<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:78506.wais]
THE FINANCIAL COLLAPSE OF ENRON--Part 4
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MARCH 14, 2002
__________
Serial No. 107-90
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
78-506 WASHINGTON : 2002
________________________________________________________________________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
RICHARD BURR, North Carolina BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
GREG GANSKE, Iowa BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
TOM DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
-- -- (Vacancy)
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
JAMES C. GREENWOOD, Pennsylvania, Chairman
MICHAEL BILIRAKIS, Florida PETER DEUTSCH, Florida
CLIFF STEARNS, Florida BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio TED STRICKLAND, Ohio
RICHARD BURR, North Carolina DIANA DeGETTE, Colorado
ED WHITFIELD, Kentucky CHRISTOPHER JOHN, Louisiana
Vice Chairman BOBBY L. RUSH, Illinois
CHARLES F. BASS, New Hampshire JOHN D. DINGELL, Michigan,
-- -- (Vacancy) (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Astin, Ronald T., Partner, Vinson & Elkins, L.L.P............ 15
Derrick, James V., Jr., Former General Counsel, Enron
Corporation................................................ 16
Dilg, Joseph C., Managing Partner, Vinson & Elkins, L.L.P.... 19
Rogers, Rex R., Vice President and Associate General Counsel,
Enron Corporation.......................................... 15
Sefton, Scott M., former General Counsel, Enron Global
Finance, Enron Corporation................................. 15
St. Clair, Carol L., former Assistant General Counsel, ECT
Resources Group, Enron Corporation......................... 22
(iii)
FINANCIAL COLLAPSE OF ENRON CORPORATION, WITH FOCUS ON ENRON'S INSIDE
AND OUTSIDE COUNSEL
----------
THURSDAY, MARCH 14, 2002
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, James C. Greenwood
(chairman) presiding.
Members present: Representatives Greenwood, Stearns, Burr,
Whitfield, Bass, Tauzin (ex officio), Deutsch, Stupak,
Strickland, DeGette, and Dingell (ex officio).
Also present: Representatives Markey, Green, and Waxman.
Staff present: Tom Dilenge, majority counsel; Mark
Paoletta, majority counsel; Brendan Williams, legislative
clerk; Mike Geffroy, majority counsel; Will Carty, legislative
clerk; Peter Kielty, legislative clerk; Shannon Vildostegui,
majority counsel; David Cavicke, majority counsel; Brian
McCullough, majority professional staff; Edith Holleman,
minority counsel; Consuela Washington, minority counsel; Chris
Knauer, minority investigator; and Jonathan Cordone, minority
counsel.
Mr. Greenwood. The hearing will come to order.
Witnesses may be seated at the table. Good morning and
welcome to the Subcommittee on Oversight and Investigations'
ongoing inquiry into the financial collapse of the Enron
Corporation.
Today we are going to examine elements of Enron's structure
of corporate governance. The words ``corporate governance''
describe the entire architecture of how a modern corporation is
managed on behalf of its investors and stockholders, its
customers, and its employees.
This encompasses executives at every level, corporate
accounting teams, corporate counsel, senior managers, and the
Board of Directors. It also includes the outside expert advice,
often consultants, attorneys, and accountants, that senior
management, the Board of Directors, or the Audit Committee of
the Board retained to provide advice on a wide array of issues.
These issues ranged from human resources to tax analyses to
producing an audited financial statement.
Up to this point, our work has focused primarily on what
went wrong at Enron. Through our work we have been able to cast
a considerable amount of light on the people and transactions
behind this company's unparalleled failure. As a result of this
effort, we have been able to slowly parse the complex of self-
dealing transactions that contributed to Enron's dramatic
descent into bankruptcy.
We have also acquired a more complete understanding of how
these highly irregular transactions were cloaked behind a
curtain of nearly impenetrable financial arrangements. We know
much more, too, about the individuals who devised and
implemented these schemes.
And it becomes increasingly clear that the collapse of
Enron, which was greeted with such surprise by investors,
shareholders, customers, analysts, and employees alike, was
more than mere happenstance. Instead, a complex infrastructure
of ill-defined partnerships, hedges, collars, and various other
off-the-books transactions were purposefully designed to
mislead shareholders about Enron's precarious financial
position.
Phantom assets and phantom earnings were created in order
to create phantom wealth. Sadly, the investors and employees
who risked their fortunes and their futures were very real, and
they suffered very real losses.
Among the many mysteries yet surrounding this collapse, one
in particular has emerged. What role, whether by omission,
commission, did Enron's corporate governance team play in the
slide into bankruptcy and the increasing reliance on riskier
and riskier transactions to keep Enron afloat?
It is especially important to undertake this examination,
since we now know that many of the seeds of this particular
financial tragedy were sewn years ago. How is it, then, that
the Board of Directors and senior management failed to red flag
flagrant issues of conflict of interest and highly questionable
transactions behind several key partnerships, such as the
Chewco deal and the various LJM associated transactions?
What we have discovered to date amounts to a systemic
failure on the part of Enron's legal and accounting personnel,
as well as outside counsel and accountants, both to discover
these problems and to warn of their dangers. Clearly, no
actions were taken to prevent the ensuing disaster.
A few courageous individuals attempted to raise the alarm,
but either their warnings came too late or too half-heartedly.
Or perhaps the right people didn't hear the alarms.
This disserving situation brings us to the question at hand
today. Where were the faithful stewards of Enron? In
particular, where were the people whose fiduciary duty it was
to guard against hidden dangers and to protect the interests of
Enron and its shareholders? Where were the professionals whose
job it was to ferret out wrongdoing and guard against
malfeasance? What, if any, actions did they either take or
recommend to put an end to those irresponsible actions which
eventually led to Enron's demise?
This phase of our hearing involves the people who were paid
to have known better, and who should have done more, much more,
the accountants and lawyers. Next week we will have a chance to
hear from the accountants. This morning we have before us the
attorneys, Enron's inside and outside counsel.
I look forward to this opportunity to listen to their
testimony about a wide array of issues, particularly their
actions and advice surrounding the many dubious related party
transactions. For example, I'd like to get a clearer
understanding of the attorneys' assessments and advice on the
thorny ethical problems surrounding the two LJM partnerships
which did business with Enron, even though these partnerships
created a clear conflict of interest with Enron's former CFO
Andy Fastow, who succeeded in having a financial stake on both
sides of the transactions.
I would like to know why legal counsel worked so hard to
minimize what Mr. Fastow disclosed about his financial
arrangements with the partnerships in proxy filings. Was his
comfort level about disclosure more compelling than the
interests of Enron and its shareholders in ensuring that he
wasn't benefiting improperly at their expense?
I would like to learn about the attorney's role and advice
in the formation and evidence of the LJM Enron transaction
approval process. It was this document that was supposed to
manage the inevitable conflicts arising out of such a curious
arrangement and ensure the fairness of these transactions to
Enron and its shareholders.
Why did it take so long for the lawyers to catch inherent
weaknesses in the process? And why weren't these corrected in a
timely manner?
I also want to know why no one seemed to be monitoring the
actions of senior Enron employees working on behalf of outside
interests, and why the LJM2 private placement memorandum, in
which Mr. Fastow and other Enron employees were marketing their
access to inside information, failed to raise any red flags to
those responsible for looking out for Enron's interests?
We are not looking at 1 or 2 missteps here, but a pattern
of behavior characterized by neglect and avoidance by Enron's
legal advisors. We will also look at the series of decisions
and actions following Sherron Watkins' letter to Kenneth Lay.
Who made the decision that the investigation of her serious
allegations by Enron's outside counsel, Vinson & Elkins, should
be so limited, and on whose advice?
We have a lot of ground to cover, so let me thank the
witnesses who have come today. You all have been responsive to
our requests for interviews, and we appreciate that. We also
appreciate that you have come here voluntarily to try to help
us understand your role in these matters. We thank you again.
I will now recognize the ranking member, the gentleman from
Florida, Mr. Deutsch.
[The prepared statement of Hon. James C. Greenwood
follows:]
Prepared Statement of Hon. James C. Greenwood, Chairman, Subcommittee
on Oversight and Investigations
Good morning, and welcome to the Subcommittee on Oversight and
Investigations' ongoing inquiry into the financial collapse of the
Enron Corporation. Today, we are going to examine elements of Enron's
structure of ``Corporate Governance''. The words Corporate Governance
describe the entire architecture of how a modern corporation is managed
on behalf of its investors and stockholders, its customers and its
employees.
This encompasses executives at every level, corporate accounting
teams, corporate counsel, senior managers and the Board of Directors.
It also includes the outside expert advice, often consultants,
attorneys and accountants, that senior management, the Board of
Directors or the Audit Committee of the Board, retain to provide advice
on a wide array of issues.These issues range from human resources to
tax analyses, to producing an audited financial statement.
Up to this point, our work has focused primarily on what went wrong
at Enron. Through our work, we have been able to cast a considerable
amount of light on the people and transactions behind this company's
unparalleled failure.
As a result of this effort, we have been able to slowly parse the
complex web of self-dealing transactions that contributed to Enron's
dramatic decent into bankruptcy.
We have also acquired a more complete understanding of how these
highly irregular transactions were cloaked behind a curtain of nearly
impenetrable financial arrangements. We know much more too about the
individuals who devised and implemented these schemes.
And it becomes increasingly clear that the collapse of Enron, which
was greeted with such surprise by investors, shareholders, customers,
analysts and employees alike, was more than mere happenstance. Instead
a complex infrastructure of ill-defined partnerships, hedges, collars,
and various other off-the-books transactions were purposefully designed
to mislead shareholders about Enron's precarious financial position.
Phantom assets and phantom earnings were created out of whole cloth in
order to create phantom wealth. Sadly, the investors and employees who
risked their fortunes and their futures were very real and they
suffered real losses.
Among the many mysteries yet surrounding this collapse, one in
particular has emerged. What role, whether by omission or commission,
did Enron's corporate governance team play in the slide into bankruptcy
and the increasing reliance on riskier and riskier transactions to keep
Enron afloat?
It is especially important to undertake this examination, since we
now know that many of the seeds of this particular financial tragedy
were sewn years ago. How is it then that the Board of Directors and
senior management failed to red flag flagrant issues of conflict of
interest and highly questionable transactions behind several key
partnerships--such as the Chewco deal and the various LJM-associated
transactions?
What we have discovered to date amounts to a systemic failure on
the part of Enron's legal and accounting personnel, as well as outside
counsel and accountants, both to discover these problems and to warn of
their dangers. Clearly no actions were taken to prevent the ensuing
disaster.
A few courageous individuals attempted to raise the alarm, but
either their warnings came too late or too half-heartedly. Or perhaps
the right people didn't hear the alarm. This disturbing situation
brings us to the question at hand today:
Where were the faithful stewards of Enron? In particular, where
were the people whose fiduciary duty it was to guard against hidden
dangers and to protect the interests of Enron and its shareholders?
Where were the professionals whose job it was to ferret out wrongdoing
and guard against malfeasance? What, if any actions did they either
take or recommend to put and end to those irresponsible actions which
eventually led to Enron's crack-up?
This phase of our hearing involves the people who were paid to have
known better, and who should have done more . . . much more--the
accountants and the lawyers. Next week we'll have a chance to hear from
the accountants. This morning, we have before us the attorneys--Enron's
inside and outside counsel.
I look forward to this opportunity to listen to their testimony
about a wide array of issues, particularly their actions and advice
surrounding the many dubious ``related party transactions''.
For example, I would like to get a clearer understanding of the
attorneys' assessment and advice on the thorny ethical problems
surrounding the two LJM partnerships, which did business with Enron
even though these partnerships created a clear conflict of interest
with Enron's former CFO Andy Fastow . . . who succeeded in having a
financial stake on both sides of the transactions.
I would like to know why legal counsel worked so hard to minimize
what Mr. Fastow disclosed about his financial arrangements with the
partnerships in proxy filings.
Was his comfort-level about disclosure more compelling than the
interests of Enron and its shareholders in ensuring that he wasn't
benefiting improperly at their expense?
I would like to learn about the attorneys' role and advice in the
formation and evolution of the LJM-Enron transaction approval
process.it was this process that was supposed to manage the inevitable
conflicts arising out of such a curious arrangement and ensure the
fairness of these transactions to Enron and its shareholders. Why did
it take so long for the lawyers to catch inherent weaknesses in the
process? And why weren't these corrected in a timely manner?
I also want to know why no one seemed to be monitoring the actions
of senior Enron employees working on behalf of outside interests. And
why the LJM2 private placement memorandum--in which Mr. Fastow and
other Enron employees were marketing their access to insider
information--failed to raise any red flags to those responsible for
looking out for Enron's interests?
We are not looking at one or two missteps here, but a pattern of
behavior characterized by neglect and avoidance by Enron's legal
advisors.
We'll also look at the series of decisions and actions following
Sherron Watkin's letter to Kenneth Lay. Who made the decision that the
investigation of her serious allegations by Enron's outside counsel,
Vinson & Elkins, should be so limited? And on whose advice?
We've got a lot of ground to cover. So let me thank the witnesses
who have come today. You all have been responsive to our requests for
interviews and we appreciate that. We also appreciate that you have
come here voluntarily to try to help us understand your role in these
matters. Thank you again.
I will now recognize the Ranking Member.
Mr. Deutsch. Thank you, Mr. Chairman. And the reason I
asked staff to put up this chart is this is a chart that we
showed at the hearing with the Enron executives of one of the
4,000 partnerships. And we have looked inside of the
partnership at this point in time, and I guess I feel
comfortable saying that at least this partnership was illegal,
because if we look inside of the partnership it did not have a
business purpose.
And we can get into the details at a later date, but my
understanding is that at least the structure of the partnership
was approved by Mr. Derrick and by Mr. Astin. And I guess in
the questioning, I guess I am going to ask you direct questions
about if we now know, or at least you can disagree with my
assessment, that the partnership itself was a violation of
security laws. The structure might not have been, but inside,
why did, you know, as attorneys representing a client and
representing your company, did we miss that?
And since my understanding is the structure of the
partnerships were not that much different, and we know that
some--at least several of the others that we have been able to
understand and really delve into, also did not have business
purposes. Why did that occur?
So I yield back the balance of my time and look forward to
questions.
Mr. Greenwood. The Chair thanks the gentleman from Florida
and recognizes the Chairman of the full committee, the
gentleman from Louisiana, Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman. And let me
commend you again for doing such a thorough job throughout this
process, and for the great assistance the minority has provided
and partnership in which this investigation has occurred.
This subcommittee's task has been to investigate the
reasons behind the sad tale of Enron's collapse, so that the
full committee can understand what went wrong, so that our
committee and our committees of Congress might address,
legislatively if necessary, some of these problems.
Only by accurately identifying the basic problems can we
accurately identify an appropriate remedy. I believe we have
gone a long way toward this goal, but we have more to learn.
And we have been able to begin exploring remedies because of
the subcommittee's good and instructive work, and I want to
thank you for that.
This morning we turn, of course, to the attorneys in the
equation, the people whose duty it was to protect the legal
interest of Enron and its shareholders, and I look forward to
hearing what they have to say for themselves.
Last month when we had Sherron Watkins before us I pointed
out a legal doctrine known as the Doctrine of Last Clear
Chance. It holds that basically, even if you are totally in the
right on the highway, if you had the last clear chance to avoid
a crash, you could be responsible for what happened if you
didn't exercise the last clear chance to avoid that accident.
Indeed, Sherron Watkins offered Enron's leadership a last
clear chance to avoid the crash, not to avoid a total loss, not
to avoid damage, but to avoid potentially a total crash. And
what strikes me today about her action as a loyal employee was
that Sherron Watkins was not an attorney. She did the right
thing, I think, but she did something that was technically not
her job, something that might more directly be associated with
the legal team, counsel's office. Vinson & Elkins' team was
responsible, basically, for helping Enron make the right legal
choices.
I think, in some respects, the folks who literally had that
responsibility and who could have helped avoid the last clear
chance, and, therefore, this accident, are with us today, and
we intend to learn as much as we can about what went wrong. Why
didn't this team and the counsel's office at Enron see these
problems as clearly as a non-attorney, Sherron Watkins, did?
Well, it is clear from my investigations that others in the
company, particularly the Board of Directors, either relied
upon the supervision of the legal team and the accounting firm,
as Mr. Skilling claims to have done, or they are hiding behind
that assertion to hide the problems of their own failure to
supervise the conduct of some of their employees.
I understand that arrangements of duties and functions
among attorneys are complex. I am an attorney myself, and I
understand those complexities. Responsibilities, in fact, at
Enron were divided, and I know that Enron was a huge and a
complicated operation, so I want to hear your sides of the
story as carefully as we can, and to understand it as carefully
as we can.
But we want to hear about the LJM transactions, the
approval processes, which were meant to prevent the CFO from
taking advantage of the company and its shareholders. All of
these controls the Board told us about, you were asked to
examine, when, in fact, Mr. Lay's attention was brought to
these problems, and he asked for assistance from his counsel's
office and eventually from the legal team who were hired to
protect the company.
I want to know why the outside counsel, the duty to make
sure these extremely complex transactions would not put Enron
at risk, eventually signed off on it and ended up providing
legal cover for what would turn out to be a very destructive
transaction--set of transactions.
I want to know why when Mr. Lay was advised by Ms. Watkins
that the company was about to implode, that individuals had
breached their fiduciary duty and were investors, and had
breached their ethical duty and were crossing the line by
making money from these transactions, and she requested that an
outside legal team look at what happened, and she requested
that outside auditors look at what happened, why it was that
the counsel's office ended up, instead, turning to the same
legal team whose duty it had been in the first place to prevent
those transactions from endangering the company, turning to
them to ask them if it was a good idea to get an outside legal
team and then receiving a reply, I suppose that you could sort
of guess would be coming, that, no, everything is okay, we
don't need a legal team to look over our shoulder and tell us
we did a good job or a bad job.
Why, instead, wasn't an outside legal team called in to
look at whether or not people had adequately protected the
company? And why it was, at that point, that counsel's office
said maybe it isn't a good idea to get some outside auditors in
and check and see whether the auditors hired by the company had
led us astray.
Why, instead, the same legal team is called in to give
advice to the president of the company that, no, you don't need
anybody else to look at this, everything is okay. It is a
pretty serious problem.
Mr. Chairman, I look forward to this hearing and look
forward to giving these important witnesses a chance to clarify
these questions and to help us understand these complex
relationships. I yield back my time.
[The prepared statement of Hon. W.J. ``Billy'' Tauzin
follows:]
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Thank you Chairman Greenwood. And let me commend you for doing such
a thorough job throughout this process. This Subcommittee's task has
been to investigate the reasons behind this sad tale of Enron's
collapse, so that the Full Committee can understand what went wrong.
Only by accurately identifying the basic problems can we accurately
identify an appropriate remedy. And I believe we've gone a long way
towards this goal. We have more to learn, but we've been able to begin
exploring remedies because of the Subcommittee's good and instructive
work, and I thank you for that.
This morning we turn to the attorneys--the people whose duty it was
to protect the interests of Enron and its shareholders. I look forward
to hearing what they have to say for themselves.
Last month, when we had Sherron Watkins before us, I pointed to a
legal doctrine known as the last clear chance; this holds that,
basically, even if you're totally in the right on the highway, if you
had that last clear chance to avoid a crash, you could be responsible
for what happened.
Sherron Watkins offered Enron's leadership that last clear chance
to avoid the crash. And what strikes me today about her action as a
loyal employee was that Sherron Watkins was not an attorney. She did
the right thing, but she did something that was not in her job
description, something not directly associated with her function at
Enron.
What also strikes me is that some of the people who should have
shown Enron leadership the proper course--who could have prevented the
crash--are sitting before us today. They could have acted before
matters got out of hand. They could have been more skeptical of the
proposals and promises of the business teams. They could have looked to
learn what was really happening, and warned Enron leadership about what
they found. But they didn''t do this. They were not around to provide a
last clear chance to save the company.
I think it says something when you have non-attorneys doing what
attorneys are supposed to be doing. The attorneys are the people others
rely upon to make sure matters are okay, are legal, are not going to
put a company at undue risk.
They're the adult supervision. And it's clear from our
investigation that others in the company, particularly on the Board of
Directors, either relied on this supervision, or--as Mr. Skilling seems
to have done--hid behind it to excuse their actions.
Now I understand the arrangements of duties and functions among the
attorneys was complex. Responsibilities were divided. I know that Enron
was a huge and complicated operation. And so I want to hear their side
of the story.
I want to hear from them about the LJM transaction approval
process, which was meant to prevent the CFO from taking advantage of
the company and its shareholders. I look forward to learning about the
attorney reactions to emerging warnings that the process was flawed,
that questionable negotiations were taking place, that there were
potentially serious problems to investigate.
I want to know why outside counsel, with the duty to make sure
extremely complex transactions would not put Enron at risk, saw fit to
sign off--providing the legal cover for what would turn out to be very
destructive transactions indeed.
We do have a lot to cover this morning, Mr. Chairman. And I too
would like to thank the witnesses for coming before us this morning.
They've been responsive to our staff's requests and I thank them for
their willingness to help us accurately identify the problems here.
I yield back.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes for 3 minutes for an opening statement the
gentlelady from--I beg your pardon. The Chair recognizes the
ranking member of the full committee, the gentleman from
Michigan, Mr. Dingell.
Mr. Dingell. Mr. Chairman, I thank you for your courtesy. I
commend you for these hearings and for the inquiry by this
subcommittee into the matters now under consideration.
I want to depart from my prepared statement just to commend
my friend, the Chairman, also of the full committee for the
courage and the energy which he has brought to the matters
before us, and to express to him my respect and affection.
Mr. Chairman, one of the things that struck me as we get
deeper and deeper into the Enron investigation is the ability
of almost all of the people involved to disclaim knowledge of,
or responsibility for, any of the events that caused Enron's
collapse.
I remember a case when I was a young lawyer in the Detroit
River area. Three ships had collided in a fog in the middle of
the Detroit River, and in the case the judge observed that this
event could not have occurred because of the testimony of all
the witnesses indicated that none of the vessels was within
three-quarters of a mile of the point of impact.
The most notable of those proclaiming lack of knowledge and
responsibility are Messrs. Skilling, the former president and
chief executive officer, and Lay, the chairman of the board.
Now, although Mr. Skilling is widely understood to have been
the architect of Enron as an asset-lite energy trading company
with an increasing off-balance-sheet debt load, he presents
himself as the unfortunate, unknowing ``victim'' of some as-
yet-undefined forces of the marketplace.
Mr. Lay, who was CEO during all of Enron's history except
the last 6 months when Mr. Skilling held the job, claims that
he knew even less. Yet most of these top officers ran a company
which numerous former and current employees have described as
``crooked,'' a ``pyramid scheme,'' the home of ``house of cards
accounting,'' a place where you ``drank the Kool-aid'' instead
of questioning what was going on, and fed the earnings
``monster'' with more and more questionable deals.
Moreover, the Board of Directors, from one end to the
other, was asleep. For example, they never even bothered to
find out how much Andrew Fastow, the company's chief financial
officer, was making on his side deals with the company. To this
day, neither the Board nor anyone at the top levels of Enron
knows exactly how much Mr. Fastow made on those deals. Nor did
the Board bother to check if the controls it had ordered to
keep these deals above-board were actually being carried out.
Today we are going to hear more disclaimers of
responsibility. Today we are going to hear from lawyers who
will disclaim with great diligence. Some asked questions, but
never followed up, and we will hear from other lawyers who knew
of problems but never asked questions. For example, both the
in-house and outside lawyers who represented Enron in the
related-party transactions involving Mr. Fastow and Mr. Michael
Kopper, who worked with Mr. Fastow, will tell us that.
It wasn't their responsibility to make sure that Enron or
its accountants knew about the side guarantee with Barclay's
Bank that brought down the Jedi-Chewco deal.
It wasn't their responsibility to make sure that Mr.
Kopper's interest in Chewco was approved by the Office of the
Chairman and known by the Board of Directors, even though these
lawyers knew it was a conflict of interest violation.
It wasn't their responsibility to make sure the many deals
made between Mr. Fastow's LJM entities and Enron were actually
at arm's length and represented a fair deal for Enron in both
the short and the long term.
We will hear that most of these lawyers didn't even know
what controls were required by the Board of Directors to try
and keep related-party deals above-board. They were told that
the Board had approved the relationship with Mr. Fastow, and
that was enough. Sometimes they even relied on Mr. Fastow
himself as justification.
We will hear from lawyers who tried to find out how much
Mr. Fastow made so it could be included in Enron's proxy, but
when Mr. Fastow refused to tell them, their response was,
``Next year we will do it.'' We will hear that lawyers were not
responsible for asking about accounting decisions. We will hear
from lawyers who ignored, rationalized, or even discounted
problems brought to the company's attention by Sherron Watkins
and others.
Maybe the lawyers involved in the Enron mess were simply
doing their job. I find this a most troublesome prospect. And I
would note that it appears that the legal profession may have
changed in the 50 years since I was sworn in to the bar. At
that time, we thought that it was the responsibility of the
lawyer to serve with the highest integrity and responsibility,
to protect the interests of the clients, and to see to it that
justice is done.
Until this fiasco, then, I had always thought of lawyers as
more than highly paid technicians. In this case, I was
apparently wrong. It is very sad, Mr. Chairman.
Thank you.
[The prepared statement of Hon. John D. Dingell follows:]
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Thank you, Mr. Chairman. One of the things that has struck me as we
get deeper and deeper into the Enron investigation is the ability of
almost all of the people involved to disclaim knowledge of, or
responsibility for, any of the events that caused Enron's collapse. The
most notable of these are, of course, Jeffrey Skilling, the former
president and chief executive officer, and Kenneth Lay, the chairman of
the board.
Although Mr. Skilling is widely understood to have been the
architect of Enron as an asset-light, energy trading company with an
increasing off-balance-sheet debt load, he presents himself as a
unknowing ``victim'' of some as-yet-undefined forces of the
marketplace. Mr. Lay, who was CEO for all of Enron's history except the
six months when Mr. Skilling held the job, claims to know even less.
Yet both of these top officers ran a company which numerous former and
current employees have described as ``crooked,'' a ``pyramid scheme,''
the home of ``house of cards accounting,'' a place where you ``drank
the Kool-aid'' instead of questioning what was going on, and fed the
earnings ``monster'' with more and more questionable deals. Moreover,
the Board of Directors was asleep. For example, it never even bothered
to find out how much Andrew Fastow, the company's chief financial
officer, was making on his side deals with the company. To this day,
neither
the board nor anyone at the top levels of Enron knows exactly how
much Mr. Fastow made on those deals. Nor did the board bother to check
if the controls it had ordered to keep these deals above-board were
actually being carried out.
Today, we will hear more disclaimers of responsibility. We will
hear from lawyers who asked questions, but never followed up. And we
will hear from lawyers who knew of problems, but never asked questions.
For example, both the in-house and the outside lawyers who represented
Enron in the related-party transactions involving Mr. Fastow and
Michael Kopper, who worked for Mr. Fastow, will tell us that:
--It wasn't their responsibility to make sure that Enron or its
accountants knew about the side guarantee with Barclay's bank
that brought down the JEDI-Chewco deal.
--It wasn't their responsibility to make sure that Mr. Kopper's
interest in Chewco was approved by the Office of the Chairman
and known by the Board of Directors, even though these lawyers
knew it was a conflict of interest violation.
--It wasn't their responsibility to make sure the many deals made
between Mr. Fastow's LJM entities and Enron were actually at
arm's length and represented a fair deal for Enron in both the
short and the long term.
We will hear that most of these lawyers didn't even know what
controls were required by the Board of Directors to try to keep the
related-party deals above-board. They were told that the board had
approved the relationship with Mr. Fastow, and that was enough.
Sometimes they relied on Mr. Fastow himself as justification.
We will hear from lawyers who tried to find out how much Mr. Fastow
made so it could be included in Enron's proxy, but when Mr. Fastow
refused to tell them, their response was--``next year we'll do it.'' We
will hear that lawyers were not responsible for asking about accounting
decisions. And we will hear from lawyers who ignored, rationalized, or
discounted problems brought to the company's attention by Sherron
Watkins and others.
Maybe all the lawyers involved in the Enron mess were simply doing
their job--a most troublesome prospect. Until this fiasco, I had always
thought of lawyers as more than just highly paid technicians. In this
case, I apparently was wrong.
Mr. Greenwood. The Chair thanks the gentleman from Michigan
and recognizes the gentleman from Florida, Mr. Stearns, for 3
minutes.
Mr. Stearns. Good morning, and thank you, Mr. Chairman, for
holding this hearing. And let me again commend the staff for
the very significant and competent job they are doing in
preparing us and getting the witnesses here.
Mr. Chairman, over the course of the hearings we have had
on this, we have learned of Enron's collapse, that it was
basically a complete failure and a meltdown of fundamental
responsibilities and oversight. We have heard from a number of
Enron and Andersen officials and have developed what we think
is a very good record of all of these transactions.
LJM, the Raptor, the Chewco, were developed and managed and
hidden from scrutiny--this despite the numerous officials
pleading the Fifth Amendment here in front of our committee in
response to the subcommittee's questioning. So this hearing is
very pertinent.
Mr. Chairman, I went on the internet to look up the
American Bar Association's website to get and understand its
model rules for professional conduct. And it is interesting,
the first rule for lawyers under the rules for professional
conduct is competence. And, my colleagues, let me just read
what it says. ``A lawyer shall provide competent representation
to a client. Competent representation requires the legal
knowledge, skill, thoroughness, and preparation reasonably
necessary for preparation.''
So, Mr. Chairman, let us look at our hearing in
perspective. In fact, let us get to the nitty-gritty. Our
witnesses before us today are all attorneys. Their job was to
be the legal watchdog for Enron's transaction. From the
information we have discovered we are faced with this question:
was the failure of oversight and responsibility due to a lack
of competence or to a measure of culpability?
Mr. Chairman, Jan Avery was a woman who was an accountant
at Enron in 1993. She put herself through college going at
night. She didn't have polo shirts on and khakis when she came
to work. She came in a suit. In 1993, she was given a thin
manilla folder containing three sheets of paper. On one there
was a number, $142 million.
This was the routine loss. It was a staggering amount for
this company and for this young accountant to understand. So
she said, ``Where are the books for Enron Oil? How am I
supposed to justify $142 million loss for State tax purposes?''
Mr. Chairman, no one could answer her in Enron Company. So
I go back. We have lawyers here whose responsibility was to be
the watchdog and protect Enron. If this woman accountant at
Enron knew in 1993 that there was a problem, surely the people
at this front desk should have provided advice that was more
competent than this young woman who put herself through night
school as an accountant.
So we are here today to find out what happened. And so, Mr.
Chairman, I commend you and your staff.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes for 3 minutes for the purpose of an opening
statement the gentlelady from Colorado, Ms. DeGette.
Ms. DeGette. Thank you, Mr. Chairman. Mr. Chairman, this
investigation has really seemed to me like piecing together a
big jigsaw puzzle. And we have looked at a number of the pieces
of the puzzle so far. We have heard from senior management from
Enron of all different flavors. We have heard from the Board of
Directors. We have heard from the auditors. We have heard from
outside experts. And until today there has been a big piece of
that puzzle right in the middle missing, and that is the
attorneys who were advising Enron throughout the events that we
all know so well at this point.
I am looking forward to hearing what the attorneys have to
say today. And, in particular, I am interested in Vinson &
Elkins' representation of their client, and, in particular
there, I am interested in this preliminary investigation of
allegations that Vinson & Elkins did from Sherron Watkins'
memo. The reason I am interested in this is I think it is
almost a parable for what happened throughout Enron and for
what happened from all of the experts that were advising Enron,
because Ms. Watkins said in her memo to Mr. Lay, ``I am
incredibly nervous that we will implode in a wave of accounting
scandals. My 8 years of Enron work history will be worth
nothing on my resume. The business world will consider the past
successes as nothing but an elaborate accounting hoax.''
So what does Vinson & Elkins do when Enron asked them to do
a so-called independent investigation of these allegations?
Vinson & Elkins says, ``It was decided that our initial
approach would not involve the second-guessing of the
accounting advice and treatment provided by Arthur Andersen.
There would be no detailed analysis of each and every
transaction, and there would be no full-scale discovery-style
inquiry.''
If the allegation is that there are accounting problems,
how on earth can you have any kind of analysis when you don't
look at the accounting in coming up with your assessment?
These and many other questions I am sure will be made clear
today, Mr. Chairman, and I am looking forward to hearing the
testimony.
Thank you, and I yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentlelady and
recognizes the gentleman from North Carolina, Mr. Burr, for 3
minutes for an opening statement.
Mr. Burr. Thank you, Mr. Chairman. Let me take this
opportunity to thank our witnesses today for their willingness
to come in as we continue to peel the layers of the onion back
and try to figure out exactly what happened.
Mr. Chairman, let me commend you. The way that you have
structured these hearings, the patience that you have shown,
rather than to run out and grab headlines, we have tried to put
people together that could provide facts. And I want to just
turn to some testimony that we are going to hear today from one
of the partners at Vinson & Elkins.
And that testimony says the Enron bankruptcy filings--Enron
listed more than 400 law firms as having represented them.
Clearly, this was not a situation where Enron fell in trouble
because they didn't seek or have provided for them enough legal
help. Enron's legal affairs were directed by a highly
sophisticated in-house legal department consisting of
approximately 250 in-house lawyers. Clearly, they had at their
fingertips expertise that most companies don't have.
Enron recruited and employed experienced, highly capable
and well qualified attorneys, many of whom had previously
practiced in large law firms. There is experience within this
company that certainly dispels any belief that maybe they were
ill advised.
And it goes on in the testimony to say about the report,
specifically, the report that Vinson & Elkins was asked to
prepare and to hand over to the company, it says, ``The report
did conclude that no further investigation was necessary
because the appropriate senior-level officers of Enron were
fully aware of the primary concerns of Ms. Watkins, that Ms.
Watkins wanted Mr. Lay to address, and had, in fact, already
addressed them.''
Ladies and gentlemen that are here today, let me assure you
that we have had some Enron officials who have sat before us
and said they didn't know, they can't remember. Today I hope
you will help us fill in those blanks of who knew, who should
remember, and who was told.
I thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman, Mr. Stupak, for 3 minutes for an
opening statement.
Mr. Stupak. Thank you, Mr. Chairman. Over the brief
President's Day district work period, I held three town hall
meetings in my northern Michigan district, just as I am sure
many of my colleagues did. The No. 1 issue I heard about from
my constituents was not the current budget proposals, not a
desire for tax cuts, not even the war against terrorism,
although they are very concerned about it.
The No. 1 issue raised by people in my town hall meetings
was the Enron collapse and their passionate desire to see that
justice is served.
My district is about as far away as you can get from
Houston, Texas, without leaving the continental United States.
But constituents seem to feel a bond with the Enron employees
and their shareholders.
Mr. Chairman, my constituents, like many of us, are
saddened. They are angry, and they are frustrated. They are
saddened to see the lives of so many Enron employees shattered.
They are angry about the shredding of public trust by all the
parties involved in the Enron debacle, and they are frustrated
with the fact that many of those who have come before our
committee, with maybe the exception of Ms. Watkins, have played
dumb and had a memory that has faded away faster than Enron
stock has dropped.
Now, I hope that today's panelists will be different. I
hope they will answer our questions completely and honestly. I
hope they will not have selective memory, and I hope they will
provide us with answers.
Mr. Chairman, I yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from New Hampshire, Mr. Bass, for 3
minutes for his opening statement.
Mr. Bass. Thank you, Mr. Chairman. I really do appreciate
your holding this hearing. I believe this is either the fourth
or fifth hearing we have had on this. My friend from North
Carolina said, ``I believe it has been thoughtful and pragmatic
and informational, helpful for us in understanding what is
clearly one of the most complex financial catastrophes in
recent U.S. history.''
And I also appreciate the opportunity to hear from counsel
of various capacities willingly, which is somewhat of a change,
and I look forward to your testimony. And of particular
interest to me, quite obviously, to other members of the
subcommittee, as you have heard, are the views on the
expectations of how you define fiduciary duty and conflict of
interest.
And I am certain at the end of the day we will have a
greater understanding of Enron's related party transactions and
other agreements with those who were supposed to be protecting
the company's shareholders' interests. But I hope we also have
some sense of what these various counselors had in mind when
they made decisions to engage in certain behavior and otherwise
ignore what may appear to be rather clear rules of ethics and
accepted behavior.
Mr. Chairman, I yield back my time, so that we may proceed
with the testimony and inquiry.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Paul E. Gillmor, a Representative in
Congress from the State of Ohio
Thank you Mr. Chairman for your continued efforts in sorting
outEnron's financial breakdown. In particular, I welcome this
opportunity to seek the viewpoints of the company's in-house and
outside counsel. I am hopeful the witnesses today will shed even more
light on how an irresponsible corporation misrepresented its financial
condition and manipulated all who had an interest in them.
I should also point out that in an effort to further increase
corporate accountability and protect shareholders' rights, I recently
introduced H.R. 3745, the Corporate Charitable Disclosure Act of 2002.
This legislation would require companies to make publicly available
each year the total value of contributions made to non-profit
organizations during the previous fiscal year.
Once again I thank the Chairman for my time and look forward to the
witnesses' testimony.
Mr. Greenwood. The Chair thanks the gentleman for that, and
welcomes our witnesses today.
Let me introduce them. They are Scott M. Sefton, Esquire,
former General Counsel with Enron Global Finance. Good morning,
sir.
Rex Rogers, Esquire, Vice President and Associate General
Counsel from Enron Corporation. Good morning, Mr. Rogers.
James V. Derrick, Jr., Esquire, former General Counsel,
Enron Corporation. Good morning, Mr. Derrick.
Joseph C. Dilg, Esquire, Managing Partner, Vinson & Elkins.
Good morning, sir.
Ronald T. Astin, Esquire, Partner of Vinson & Elkins. Good
morning to you.
And Carol L. St. Clair, Esquire, former Assistant General
Counsel, ECT Resources Group of Enron Corporation. Good
morning, Ms. St. Clair.
You are aware, all of you, that the committee is holding an
investigative hearing. And in doing so, we have the practice of
taking testimony under oath. Do any of you have objections to
giving your testimony under oath? Seeing no such objection, I
would also advise you that under the rules of the House and the
rules of this committee, you are entitled to be advised by
counsel.
Do any of you--during your testimony, do any of you seek to
be advised by counsel during your testimony? Seeing that none
of you do, in that case, if you would please rise and raise
your right hands, I will swear you in.
[Witnesses sworn.]
Mr. Greenwood. Okay. You may please be seated. You are now
under oath.
And let me begin with Mr. Sefton, and ask you, sir, do you
have an opening statement?
TESTIMONY OF SCOTT M. SEFTON, FORMER GENERAL COUNSEL, ENRON
GLOBAL FINANCE, ENRON CORPORATION; REX R. ROGERS, VICE
PRESIDENT AND ASSOCIATE GENERAL COUNSEL, ENRON CORPORATION;
JAMES V. DERRICK, JR., FORMER GENERAL COUNSEL, ENRON
CORPORATION; JOSEPH C. DILG, MANAGING PARTNER, VINSON & ELKINS,
L.L.P.; RONALD T. ASTIN, PARTNER, VINSON & ELKINS, L.L.P.; AND
CAROL L. ST. CLAIR, FORMER ASSISTANT GENERAL COUNSEL, ECT
RESOURCES GROUP, ENRON CORPORATION
Mr. Sefton. Yes, I do. Chairman Greenwood----
Mr. Greenwood. Would you pull the microphone over to you?
It is rather directional. It is the silver one that amplifies
your voice, and the closer the better.
Mr. Sefton. Chairman Greenwood----
Mr. Greenwood. You have 5 minutes to give your opening
statement.
Mr. Sefton. [continuing] and members of the subcommittee,
good morning. I joined Enron Global Finance in the fall of
1999. I left Enron Global Finance about a year later in early
October 2000.
I understand that this subcommittee----
Mr. Greenwood. I am sorry to interrupt you, Mr. Sefton. You
probably want to pull that microphone--raise it up a little
bit. There you go. And get that as close to you as possible.
Thank you, sir.
Mr. Sefton. I understand that this subcommittee would like
to discuss with me today certain matters relating to my time in
Enron Global Finance. Please note that it has been over a year
since I worked at Enron. That as a former employee I do not
have access to my own Enron documents, and have not had access
since I left the company, and that I have had a limited amount
of time to prepare for this hearing.
That said, I look forward to answering your questions today
to the best of my ability.
Mr. Greenwood. Thank you, Mr. Sefton. We will be mindful of
those concerns.
Mr. Rogers, do you have an opening statement, sir?
TESTIMONY OF REX R. ROGERS
Mr. Rogers. I just have a short comment. Good morning, Mr.
Chairman.
Mr. Greenwood. Good morning, sir.
Mr. Rogers. I do not have a long prepared statement but
want to thank the committee for inviting me here today. For the
past 16\1/2\ years, I have been employed as an attorney for
Enron Corp, currently managing several corporate attorneys in
the fields of employment law, environmental law, information
and technology, intellectual property, securities, mergers and
acquisitions, and general corporate matters. I have neither a
background nor expertise in accounting matters.
Over the past several months I have cooperated fully with
the Wilmer, Cutler & Pickering attorneys in preparation of the
Powers Report, with the FBI who interviewed me on several
issues, and with your staff members only a week ago. Now I hope
to be able to assist the members in your inquiry of Enron Corp
and am prepared to answer any and all of your questions.
Thank you.
[The prepared statement of Rex R. Rogers follows:]
Prepared Statement of Rex R. Rogers, Vice President and Associate
General Counsel, Enron Corporation
Mr. Chairman: I do not have a prepared statement, but want to thank
the Committee for inviting me here today.
For the past sixteen and one-half years I have been employed as an
attorney for Enron, now managing several corporate attorneys in the
fields of employment law, environmental law, information and
technology, intellectual property, securities, mergers and
acquisitions, and general corporate matters. I neither have a
background nor expertise in accounting matters.
Over the past several months I have cooperated fully with the
Wilmer, Cutler & Pickering attorneys in preparation of the Powers
Report; with the FBI who interviewed me on several issues; and with
your staff members only a week ago. Now I hope to be able to assist the
Members in your inquiry of Enron Corp. and am prepared to respond to
any questions.
Thank you.
Mr. Greenwood. Thank you, Mr. Rogers. We do appreciate your
cooperation.
Mr. Derrick, do you have an opening statement, sir?
TESTIMONY OF JAMES V. DERRICK, JR.
Mr. Derrick. Yes, I do, Mr. Chairman.
Mr. Greenwood. We can hear you, and, please, you have 5
minutes to make your opening statement, if you choose to.
Mr. Derrick. Good morning to each of you. I am Jim Derrick,
and I, too, am pleased to be here with you today to answer any
questions you may have for me.
From the summer of 1991 until March 1 of this year, I had
the great privilege of serving as the General Counsel for Enron
Corp, and as a member of a legal team of more than 200 women
and men for whom I had, and still have, the utmost respect and
admiration. I graduated from the University of Texas School of
Law in 1970, had the honor of serving as judicial clerk to the
Honorable Homer Thornberry of the United States Court of
Appeals for the Fifth Judicial Circuit, and then I practiced
law at Vinson & Elkins for 20 years until I was requested by
Enron Corp, more than a decade ago, to become its General
Counsel.
First, I commend you in your efforts to examine the tragedy
that has befallen Enron, so that the lessons learned here may
help others avoid similar misfortune.
Second, I wish to express my sincerest heartfelt sympathy
to those members of the Enron family who have lost their jobs
and suffered financially and otherwise, and to their loved ones
who have also been affected. I also want to acknowledge with
great gratitude the ongoing efforts of the more than 20,000
women and men who are still working at Enron and its affiliated
companies.
Finally, while, of course, I can't anticipate all of the
questions that you will want to ask me today, I do want to
address very briefly the question that some of you have alluded
to in previous hearings as to why we did not immediately
institute a complete forensic investigation, as contrasted with
a preliminary investigation, into the concerns expressed in the
letter received by Mr. Kenneth L. Lay last August, utilizing
firms that had no involvement in the transactions in question.
When Mr. Lay received the August letter, we took the
concerns expressed in it very seriously. We wanted to
ascertain, as promptly as practical, whether the facts
contained in the letter warranted a full-scale, forensic-type
investigation. Because of the seriousness of the allegations,
we believed it best to engage an outside firm to make this
determination, rather than to rely on an internal inquiry.
To have turned to firms with no knowledge of these complex
transactions would necessarily have required them, we believed,
to expend a very significant amount of time getting up to speed
before they could provide us with recommendations. We turned,
therefore, to Vinson & Elkins, a firm that possessed the
institutional knowledge to commence the preliminary
investigation quickly, and a firm that is widely regarded as
one of the world's very best legal institutions.
Andersen, Enron's independent accounting firm at that time,
was widely regarded as one of the world's foremost accounting
institutions. That firm, we believed, had knowledge of the
transactions and of the company, had repeatedly certified
Enron's financial statements, and had represented to the
company's Audit and Compliance Committee that it was
comfortable with, and had signed off on, the company's
financial disclosures.
To have immediately engaged another accounting firm to
examine the allegations contained in the August letter, without
first doing a preliminary investigation of the substance of the
allegations, including Andersen's position on them, would have
been seen, we believed, in the context of the matters as they
existed back in August, as an extraordinary act.
As we have seen from our experience, when we did turn in
October to an accounting firm and a law firm that had had no
involvement in the transactions, it required them, despite
their good faith Herculean efforts, several months to produce a
report, and even now there seem to be a number of issues in
respect of which the correct accounting and legal answers to
these extraordinarily complex issues remain a matter of
judgment.
Of course, had I been blessed with the gift of
clairvoyance, had I been permitted to gaze into the future and
foresee the events that would unfold in respect of Andersen, I
would have advocated the choosing of another path back in
August. But that was a gift that I was not given.
The decisions in which I participated had to be, and were,
made in the context of the matters as they then existed. They
were made in absolute good faith, with the sincere intent of
ascertaining by means of a prompt preliminary investigation
conducted by a truly world-class law firm, whether a broader
investigation, including the engagement of another accounting
firm, was warranted.
Members of the committee, I very much appreciate your
according me the time to make these remarks, and I look forward
to answering the questions you have for me today to the best of
my ability and recollection.
Thank you very much.
[The prepared statement of James V. Derrick, Jr. follows:]
Prepared Statement of James V. Derrick, Jr., Former General Counsel,
Enron Corporation
Good morning, Congressmen. I'm Jim Derrick, and I'm pleased to be
here to answer the questions you may have for me.
From the summer of 1991 until March 1 of this year, I had the great
privilege of serving as the General Counsel of Enron Corp. and as a
member of a legal team of more than 200 women and men for whom I had,
and still have, the utmost respect and admiration. I graduated from the
University of Texas School of Law in 1970, served as judicial clerk to
the Honorable Homer Thornberry of the United States Court of Appeals
for the Fifth Judicial Circuit, and then practiced law at Vinson &
Elkins for 20 years until I was asked by Enron Corp., more than a
decade ago, to become its General Counsel.
First, I commend you in your efforts to examine the tragedy that
has befallen Enron so that the lessons learned here may help others
avoid similar misfortune.
Second, I wish to express my sincerest heartfelt sympathy to those
members of the Enron family who have lost their jobs and suffered
financially and otherwise, and to their loved ones who have also been
affected. I also want to acknowledge with gratitude the ongoing efforts
of the more than 20,000 women and men who are still working at Enron
and its affiliated companies.
Finally, while I can't anticipate all the questions you will ask
today, I do want to address briefly the question that some of you have
alluded to in previous hearings as to why we did not immediately
institute a complete forensic investigation--as contrasted with a
preliminary investigation--into the concerns expressed in the letter
received by Mr. Kenneth L. Lay last August, utilizing firms that had no
involvement in the transactions in question.
When Mr. Lay received the August letter, we took the concerns
expressed in it very seriously. We wanted to ascertain, as promptly as
practical, whether the facts contained in the letter warranted a full-
scale, forensic-type investigation. Because of the seriousness of the
allegations, we believed it best to engage an outside firm to make this
determination, rather than to rely on an internal inquiry. To have
turned to outside firms with no knowledge of these complex transactions
would necessarily have required them, we believed, to expend a very
significant amount of time getting up to speed before they could
provide us with recommendations. Therefore, we turned to Vinson &
Elkins, a firm that possessed the institutional knowledge to commence
the preliminary investigation quickly and that is widely regarded as
one of the world's very best legal institutions.
Andersen, Enron's independent accounting firm at the time, was
widely regarded as one of the world's foremost accounting institutions.
The firm, we believed, had knowledge of the transactions and of the
company, had repeatedly certified Enron's financial statements, and had
represented to the Company's Audit and Compliance Committee that it was
comfortable with the Company's financial disclosures. To have
immediately engaged another accounting firm to examine the allegations
contained in the August letter without first doing a preliminary
investigation of the substance of the allegations, including
ascertaining Andersen's position on them, I believe would have been
seen, in the context of matters as they existed back in August, as an
extraordinary act.
As we have seen from our experience, when we did turn in October to
an accounting firm and a law firm that had had no involvement in the
transactions in question, it required them, despite their good faith
Herculean efforts, several months to produce a report, and even now
there seem to be a number of issues in respect of which the correct
accounting and legal answers to these extraordinarily complex issues
remain a matter of judgment.
Of course, had I been blessed with the gift of clairvoyance, had I
been permitted to gaze into the future and foresee the events that
would unfold in respect of Andersen, I would have advocated the
choosing of another path last August. But that was a gift I was not
given. The decisions in which I participated had to be, and were, made
in the context as matters then existed. They were made in absolute good
faith, with the sincere intent of ascertaining by means of a prompt
preliminary investigation conducted by a world class law firm whether a
broader investigation, including the engagement of another accounting
firm, was warranted.
I very much appreciate your according me the time to make these
remarks, Congressmen. I am ready to answer your questions to the best
of my ability and recollection. Thank you.
Mr. Greenwood. Thank you.
Mr. Dilg, do you have an opening statement?
TESTIMONY OF JOSEPH C. DILG
Mr. Dilg. Yes, sir.
Mr. Greenwood. You are recognized for 5 minutes.
Mr. Dilg. Good morning, Mr. Chairman, and members of the
committee. My name is Joe Dilg. I am the Managing Partner of
Vinson & Elkins. My partner, Ron Astin, is here to assist me--
to assist the committee in responding to its questions. We
decided, to economize on time, that I would give the opening
statement on behalf of both of us.
Vinson & Elkins, which was founded in 1917, is now an
international law firm. We have offices worldwide with
approximately 850 attorneys. Although Mr. Astin and I have each
personally worked on many Enron matters, we were directly
involved in only part of the firm's work for Enron. We are
testifying today only to our own personal knowledge.
Since Enron's bankruptcy, there have been reports and
statements that have inaccurately described the role Vinson &
Elkins played in the advice we gave to Enron. We look forward
to responding to your questions, because we are confident a
full exploration of the facts will show that our firm has met
all of its professional responsibilities.
First, let me say that the lawyers of Vinson & Elkins are
greatly saddened by the financial collapse of Enron. Many
outstanding and decent people who worked at Enron and their
families have been greatly harmed. Likewise, many Enron
investors have unfortunately lost a great deal of money. Many
cities like Houston will be harmed by the loss of the very
significant business and civic achievements of Enron.
Our work for Enron consisted of a large number of specific
projects for which we were selected by the Enron legal
department. Enron listed in its bankruptcy filing hundreds of
law firms as having represented Enron. Enron was a significant
client for many major law firms.
Enron's legal affairs were directed by a highly
sophisticated in-house legal department of approximately 250
lawyers. Enron recruited and employed experienced, highly
capable, well qualified attorneys, many of whom had previously
practiced in large law firms. Pursuant to Enron corporate
policy, Vinson & Elkins, as well as all other outside counsel
employed by Enron, were employed by and directed to interface
with Enron's legal department, not Enron's executives.
Despite our sadness over the collapse of Enron, we remain
proud to have served as Enron's counsel in many matters. Our
representation of Enron provided interesting and challenging
legal work on highly visible transactions and other matters. It
is a pleasure to work with their highly qualified in-house
counsel.
In representing Enron, our lawyers worked closely with the
world's leading investment banking firms, commercial banks, and
other major law firms. We provided Enron with quality legal
services, and we did so professionally and ethically.
Much of the committee's attention and the media's coverage
of the relationship between Enron and Vinson & Elkins has
focused on the preliminary review conducted by Vinson & Elkins
into allegations made by an Enron Vice President, Ms. Sherron
Watkins. We are pleased to have the opportunity to discuss that
matter.
Ms. Watkins indeed raised serious issues. Contrary to some
public reports and the implication of previous statements made
in hearings conducted by this committee, Vinson & Elkins did
not advise Enron that there were no problems. Our written and
oral reports pointed out significant issues, including the
credit problem in the Raptor vehicles, the aggressiveness of
the accounting, conflicts of interest, litigation risks, and
the risk of credibility-harming media attention.
The report did conclude that no further investigation was
necessary because the appropriate senior-level officers of
Enron were, at that time, fully aware of the primary concerns
expressed by Ms. Watkins, and, in fact, were taking actions to
address them.
Mr. Fastow had already resigned from his position with the
LJM partnerships, eliminating the conflict of interest issues
raised by Ms. Watkins in her letter, and earlier by Mr. McMahon
to Mr. Skilling. Prior to the delivery of our final written
report, the company had terminated the Raptor entities, which
were the primary focus of Ms. Watkins' concerns. The company
reported in its earnings release for the third quarter of 2001
a loss of more than $500 million associated with such
termination.
The bankruptcy of Enron in December of 2001, approximately
6 weeks after we delivered our written report, appears to have
been due to the convergence in the fall of 2001 of a number of
factors, many of which related to investment decisions made
years before in current events outside of Enron's control.
No one can deny that the adverse publicity associated with
the related party transactions and the accounting errors
related to the November restatement announcements contributed
to the loss of confidence Enron experienced in the energy
trading and financial markets. This confidence was critical to
the continued success of Enron's trading operations which
accounted for a significant portion of their business.
With regard to the related party transactions, it is
important to consider the role of legal counsel. If a
transaction is not illegal and has been approved by the
appropriate levels of corporation's management, lawyers,
whether inside corporate counsel or with an outside firm, may
appropriately provide the requisite legal advice and opinions
about legal issues relating to the transactions.
In doing so, the lawyers are not approving of the business
decisions that were made by their clients. Likewise, lawyers
are not passing on the accounting treatment of the
transactions.
In conclusion, I want to make it very clear that we are
confident that Vinson & Elkins fully met its ethical and
professional responsibilities in connection with our
representation of Enron. We are pleased to assist in the
committee's deliberations and are happy to answer your
questions within the constraints of our professional
responsibility to our clients.
Thank you very much, Mr. Chairman.
[The prepared statement of Joseph C. Dilg follows:]
Prepared Statement of Joseph C. Dilg, Managing Partner, Vinson & Elkins
Good morning Mr. Chairman and members of the Committee. My name is
Joe Dilg. I am the Managing Partner of Vinson & Elkins L.L.P. Vinson &
Elkins, founded in 1917, is now an international law firm of
approximately 850 lawyers. My partner Ron Astin is with me to assist in
answering the Committee's questions.
From 1991 until December 2001, I served as the Vinson & Elkins
partner primarily responsible for coordinating the firm's relationship
with Enron. In this role, I coordinated much of the legal work
performed by Vinson & Elkins for Enron through all of our offices.
Although Mr. Astin and I each personally worked on many Enron matters,
we were directly involved in only part of Vinson & Elkins' work for
Enron.
This statement, as well as the testimony that Mr. Astin and I will
provide, is based solely upon our individual personal knowledge and
best recollection of the events. We cannot purport to know and thus be
able to speak to all of the knowledge and information possessed by all
lawyers at our firm.
Since Enron's bankruptcy, there have been reports and statements
that inaccurately describe the role Vinson & Elkins played and the
advice we gave. We look forward to responding to questions as fully as
possible because we are confident a full exploration of the facts will
show that our firm fully met its professional obligations.
First, let me say that the lawyers of Vinson & Elkins are greatly
saddened by the financial collapse of Enron. Many outstanding and
decent people who worked at Enron and their families have been greatly
harmed. Likewise, many Enron investors have unfortunately lost a great
deal of money. Many cities like Houston will be harmed by the loss of
the very significant business and civic contributions of Enron and its
employees.
Our work for Enron consisted of a large number of specific projects
for which we were selected by Enron's legal department. In the Enron
bankruptcy filings, Enron listed more than 400 law firms as having
represented Enron. Enron was a significant client for a number of major
law firms.
Enron's legal affairs were directed by a highly sophisticated in-
house legal department consisting of approximately 250 attorneys. Enron
recruited and employed experienced, highly capable, and well qualified
attorneys, many of whom had previously practiced in large law firms.
Pursuant to Enron corporate policy, Vinson & Elkins and other
outside attorneys were employed by and directed to interface with
Enron's legal department, not Enron's executives.
Despite our sadness over the collapse of Enron, we remain proud to
have served as Enron's counsel in many matters. Our representation of
Enron provided interesting and challenging legal work on highly visible
matters, and it was a pleasure to work with their very able in-house
counsel. In representing Enron, our lawyers worked closely with many of
the world's leading investment banking firms, commercial banks, and law
firms. We provided Enron with quality legal services, and we fully met
our professional and ethical obligations in rendering those services.
Much of the Committee's attention and the media's coverage of the
relationship between Enron and Vinson & Elkins has focused on a
preliminary review conducted by Vinson & Elkins into allegations made
by an Enron Vice President, Ms. Sherron Watkins, in a letter and
supplemental materials delivered to Mr. Kenneth Lay in August of 2001.
We are pleased to have an opportunity to discuss that matter.
Ms. Watkins raised serious issues. Contrary to some public reports
and the implication of some previous statements made in hearings
conducted by this Committee, Vinson & Elkins did not advise Enron that
there were no problems. Our written report pointed out significant
issues, including the credit problem in the Raptor vehicles, the
aggressiveness of the accounting, conflicts of interest, litigation
risks, and the risk of credibility-harming media attention.
The report did conclude that no further investigation was necessary
because the appropriate senior level officers of Enron were fully aware
of the primary concerns Ms. Watkins wanted Mr. Lay to address--and had
in fact already addressed them. Mr. Fastow had resigned from his
position with the LJM partnerships, eliminating the conflict of
interest problems raised by Ms. Watkins and earlier by Mr. McMahon.
Prior to the delivery of our final written report, the Company
terminated the Raptor entities which were the primary focus of Ms.
Watkins' concerns. The Company reported in its earnings release for the
third quarter of 2001 a loss of more than $500 million attributable to
the termination.
The bankruptcy of Enron in December of 2001, approximately six
weeks after we delivered our written report, has been the subject of
numerous published analyses which have made clear that Enron faced very
significant business challenges. Enron had made major and highly
publicized investments in the broadband, water, international
infrastructure, and retail electric businesses, all of which had
resulted in significant illiquid capital investments and large losses
for the company. The price of Enron's common stock had already declined
approximately 60 percent from August 2000 to August 2001, when Mr.
Skilling's resignation created even more uncertainty about the company.
At the same time, Enron's online trading through Enron Online and the
related dependency on trade credit from its counter-parties was
experiencing explosive growth.
In hindsight, there appears to be a consensus that these events,
coupled with impending maturities of a significant amount of debt and
the turmoil in the financial markets created by the tragic events of
September 11, 2001, placed Enron in an extremely vulnerable position in
the fall of 2001. No one can deny, however, that the adverse publicity
associated with the related party transactions and the accounting
errors related to the November restatement announcements contributed to
the loss of confidence Enron experienced in energy trading and
financial markets. This confidence was critical to the continued
success of Enron's trading operations, which accounted for a
significant portion of Enron's business.
With regard to the related party transactions, it is important to
consider the role of legal counsel. If a transaction is not illegal and
it has been approved by the appropriate levels of a corporation's
management, lawyers, whether corporate counsel or with an outside firm,
may appropriately provide the requisite legal advice and opinions about
legal issues relevant to the transactions. In doing so, lawyers are not
approving the business judgment of their clients. Likewise, lawyers are
not responsible for the accounting treatment of the transactions.
In conclusion, I want to make it very clear that we are confident
that Vinson & Elkins fully met its professional responsibilities in
connection with our representation of Enron. We are pleased to assist
in the Committee's deliberations and are happy to answer your
questions, within the constraints of our professional responsibilities
to our clients.
Mr. Greenwood. Thank you, Mr. Dilg.
Mr. Astin, I understand that Mr. Dilg's opening statement
spoke for you as well?
Mr. Astin. That is correct, Chairman.
Mr. Greenwood. Very well.
Ms. St. Clair, do you have an opening statement?
TESTIMONY OF CAROL L. ST. CLAIR
Ms. St. Clair. Yes, I do.
Mr. Greenwood. Okay. You are recognized for 5 minutes.
Ms. St. Clair. Good morning. Mr. Chairman, and members of
the subcommittee, my name is Carol St. Clair. I start----
Mr. Greenwood. I am going to ask you to move that white
notebook and then pull the microphone front and center there
and get it nice and close. Thanks.
Ms. St. Clair. I started at Enron in 1994 working for the
Liquids Group in the Legal Department of Enron North America
Corporation. In 1995, after the Liquids Group was sold, I
transferred to Enron North America's Finance Group. I worked in
Enron North America's Finance Group until March 1999, when I
transferred to the Financial Trading Group of Enron North
America, where I remained until June of 2000.
In January 2001, after a 6-month maternity leave, I joined
Enron North America's Power Trading Group, which along with the
Gas Trading Group was sold in February in Enron's bankruptcy
proceeding.
As you know, Mr. Chairman, I am appearing this morning
voluntarily. To date, I have fully and freely cooperated with
the subcommittee's investigation, and intend to continue to do
so. Mr. Chairman, I will, to the best of my ability, be glad to
answer questions you or any of the members of the subcommittee
may have this morning. Thank you.
[The prepared statement of Carol St. Clair follows:]
Prepared Statement of Carol St. Clair, Former Assistant General
Counsel, ETC Resources Group, Enron Corporation
Good morning. Mr. Chairman and Members of the subcommittee, my name
is Carol St. Clair. Last month, I accepted a new position as a trading
attorney in the Legal Department of UBS Warburg Energy, LLC after
working at Enron Corporation for more than seven years. I started at
Enron in 1994, working for the Liquids Group in the legal department of
Enron North America Corporation. In 1995, after the Liquids Group was
sold, I transferred to Enron North America's Finance Group. I worked in
the Finance Group until March 1999 when I transferred to Enron North
America's Financial Trading Group where I served until June 2000. In
January 2001, after a six month maternity leave, I joined Enron North
America's Power Trading Group.
As you know, Mr. Chairman, I am appearing this morning voluntarily.
To date, I have fully and freely cooperated with the subcommittee's
investigation and intend to continue to do so. Mr. Chairman, I will, to
the best of my ability, be glad to answer questions you or any other
members of the subcommittee may have.
Thank you.
Mr. Greenwood. We thank you, Ms. St. Clair, and appreciate
your cooperation.
The Chair recognizes himself for 10 minutes for purposes of
inquiry. And let me address my first question to Mr. Dilg. Mr.
Dilg, you are the Vinson & Elkins engagement partner for the
Enron account, and you have worked on the account since 1990,
when Jim Derrick handed over the account to you when he left
V&E to become Enron's General Counsel.
Reportedly, Enron is V&E's single largest client. V&E
billed Enron over $36 million in 2001 and over $150 million
during the past 5 years. By comparison, Arthur Andersen billed
$54 million to Enron in 2001. V&E's partners earned a reported
average annual income of $655,000. Your first year associates,
straight out of law school, salary starts at $122,000 per year.
In August of 2001, Jim Derrick called and asked you to look
into allegations regarding accounting improprieties and
conflicts of interest at Enron. Sherron Watkins asked that
Enron investigate her concerns and specifically recommended
that V&E not be used, because V&E had done much of the legal
work on the problematic transactions.
Nevertheless, you and Mr. Derrick concluded that V&E could
conduct a review of Ms. Watkins' allegations. In brief, V&E
took on the task of investigating its own work. The question
is: was there not an inherent and obvious conflict of interest
for V&E in taking on the investigation?
Mr. Dilg. No, sir, there was not a conflict of interest in
Vinson & Elkins undertaking the investigation. Ms. Watkins
raised a number of issues in her letter. Her primary concern
was Mr. Lay being aware of the business issue that faced Enron
that there were large losses in the Raptor partnerships that
are large obligations under the derivatives written with the
Raptor partnerships that would be backed up by Enron stock, and
the issue of how to deal with that with the Enron shareholders
going forward as far as the dilution that would occur.
She raised issues of the conflict of interest created by
Mr. Fastow's participation in LJM and a number of other issues.
She mentioned in her letter that Vinson & Elkins had written
true sale opinions on some of the transactions, and, therefore,
would have a conflict, but her allegations did not address the
legal work provided by Vinson & Elkins. We were not being asked
to review our own work.
Mr. Derrick was aware that we had previously represented
Enron on some of the transactions that she was talking about,
but the appropriate standard, I believe, is whether or not our
own interest would materially interfere with our work. We did
not feel that we had a conflict of interest based on what we
were being asked to do.
Mr. Greenwood. Well, yes, but you certainly had an interest
in keeping the client. And wouldn't it seem to be the case that
had V&E reviewed its own work and/or had V&E sought outside
counsel to review its own work, that outside counsel
recommended to V&E that--or advised Enron, I should say, that
V&E had given it less than adequate counsel, that it certainly
might have threatened your interest in keeping your largest
client, would it not?
Mr. Dilg. Again, we were not being asked to review our own
work. We were being asked to conduct a preliminary review to
see whether a further, more extensive forensic review was
necessary. Ms. Watkins was raising matters that were well known
to a number of executives in the company and transactions that
had been approved by the Board of Directors of the company.
We were not being asked to review the quality of the legal
work on any of the transactions, and I am not sure that there
has been any--in any of the materials that I have seen any
allegations that the legal work in putting the transactions
together had any infirmities.
Mr. Greenwood. Well, here is what the Powers Report notes.
``The result of the V&E review was largely predetermined by the
scope and the nature of the investigation and the process
employed. The Powers Committee identified the most serious
problems in the Raptor transactions only after a detailed
examination of the relevant transaction, and, most importantly,
discussions with our accounting advisors, both steps that Enron
determined and V&E accepted would not be part of V&E's
investigation.''
``With the exception of Watkins, V&E spoke only with very
senior people at Enron and Andersen. Those people, with few
exceptions, have substantial professionalism and personal
stakes in the matters under review. The scope and process of
the investigation appear to have been structured with less
skepticism than was needed to see through these particularly
complex transactions.''
That is what Powers said, which is quite different from
what you have just said. How would you respond to the Powers
Report's assertions?
Mr. Dilg. I think it is important to understand the
difference in the scope and purpose of the special committee
formed by the Board of Directors shortly after our report was
delivered. It was in response to an SEC inquiry as well as
derivative suits being filed against the company and had a much
broader scope as far as looking at overall related party
transactions.
We were making a preliminary review of the matters raised
by Ms. Watkins, which both in her letter and when we
subsequently interviewed her, primarily related to the Raptor
transactions. I think that is consistent with what the Powers
Report says that she told Mr. Lay. And to make sure that Mr.
Lay, in coming back in as CEO, understood the serious business
issues they had with the Raptor transactions.
She raised questions as to the accounting. The company's
Audit Committee had chosen Arthur Andersen as their
accountants. We wanted to make sure in our review that Arthur
Andersen had the proper facts, that they had all of the facts
that they needed to make the review, and that they were
comfortable with their accounting decisions. But we were not in
a position to second-guess Arthur Andersen's ultimate
professional judgment on the accounting issues involved.
Mr. Greenwood. Well, you may not have been in a position to
second-guess the details of the accounting firm, but you
certainly had a responsibility to protect the company from
liability, did you not? The company has faced 77 lawsuits as a
result of these partnerships and the demise of the company, and
I can't quite understand why it is that V&E would take the
position that it didn't have some responsibility to its client
to examine the potential risk that these transactions imposed
in terms of civil liability.
Mr. Dilg. I think we, both in our oral conversations with
Mr. Derrick and Mr. Lay, and in our written report, pointed out
the risk that these transactions posed in connection with
shareholder litigation, as far as the ability of a potential
plaintiff's lawyer, etcetera, to paint these transactions in a
very bad light. I think we picked up references that we had had
in some of our interviews to bad cosmetics, if you will.
Again, the focus of the review was to determine whether
there were additional facts that were not known at that time
that warranted further investigation. We did not find that any
of the individuals that Ms. Watkins said to check with to see
if she was all wet had any additional facts, or felt that there
were any additional facts that weren't known at that time to
make sure Mr. Lay knew how to address the transactions.
Mr. Greenwood. Well, let us talk about bad cosmetics.
During the course of your inquiry, you interviewed Jeffrey
McMahon. In the summary of Mr. McMahon's first interview on
August 30, 2001, with you, you note that he indicated that some
bankers thought there might be linkage between investing in LJM
and future business with Enron.
In his second interview with you conducted on October 18,
2001, a few days after you submitted your report, Mr. McMahon
told you of specific instances where investment bankers
complained to him of being pressured to invest in LJM
transactions, or were promised Enron business if they invested
in LJM.
Mr. McMahon identified specific institutions--First Union,
Merrill Lynch, Deutsche Bank, Chase Bank--and specific bankers,
including Paul Riddle, and provided the names of Enron
employees who could provide additional information on this
subject--Ben Glisan, Tim Despain, Ray Bowen, and Kelly Booth.
This subcommittee has learned of other individual bankers who
have complained.
In your October 15, 2001, letter to Mr. Derrick, you wrote,
``The second potential conflict of interest identified by
several individuals was that investors in LJM may have
perceived that their investment was required to establish or
maintain other business relations with Enron. Although no
investors in LJM were interviewed, both Mr. Fastow and Mr.
McMahon stated unequivocally that they had told potential
investors that there was no tie-in between LJM investment and
Enron business.''
Your description of what you had learned appears to be
highly misleading. Mr. McMahon clearly indicated in his first
report that some banks--that there was a linkage, and that
someone at Enron had made these promises. Presumably, given his
position, it was Mr. Fastow. But you make it appear as if they
are both shooting down this allegation when, in fact, it was
Mr. McMahon who raised the allegation. And he clearly had names
of individuals and banks as set forth in the summary of the
second interview.
Based on the facts you knew at the time you submitted the
report, why isn't your description misleading?
Mr. Dilg. I don't believe our description is misleading,
Mr. Greenwood. We did want to alert the company to the concerns
raised, I think both by Ms. Watkins and Mr. McMahon, that they
had heard that there was linkage. Mr. McMahon told us that he
had told any banker that asked him that there was no linkage.
Mr. Fastow also adamantly denied any linkage.
The concerns we heard raised were some people within
investment banking and commercial banking institutions
grumbling because they didn't get deals that they thought they
were supposed to get because they invested in LJM, which
indicated----
Mr. Greenwood. Did you ask those bankers if, in fact, they
had been made promises or had threats made against them?
Mr. Dilg. We did not.
Mr. Greenwood. Why is that?
Mr. Dilg. We did not interview anyone outside the company
at this point in time.
Mr. Greenwood. They just took the words of the--Sherron
Watkins has these allegations about Fastow and other people
wearing two hats, conflicts of interest. You go to them and
basically say, ``Do you have conflicts of interest? There are
allegations that bankers felt that you were squeezing them on
these deals. Did you do that?'' They say no. You go to the
bankers and say, ``We heard you had complaints. What was your
experience with Fastow that caused you to complain?'' You
didn't do that?
Mr. Dilg. We didn't interview anyone outside of the company
in connection with our preliminary review. Mr. McMahon had
indicated to us in the initial interview that he was not aware
of any situation where a banking arrangement looked unusual.
Again, both Mr. McMahon and Mr. Fastow denied there was any
linkage, or at least Mr. Fastow denied there was any linkage.
Mr. McMahon said he told the banks there was no linkage.
His information that he gave to us after we had submitted
our report was more detailed. Within I think a week--I am not
positive on the date--but within a very short period of time
after that interview, Mr. McMahon was the chief financial
officer of the company in charge of all of the banking
relationships.
Mr. Greenwood. My time has expired. But did you ask Mr.
McMahon for the names of these individuals that he complained
about to begin with, in the first interview?
Mr. Dilg. I can't recall that we did.
Mr. Greenwood. Didn't that raise any red flags with you
that would cause you--I mean, I am trying to understand why the
first thing you wouldn't have done, the next thing you would
have done was say, ``Oh, my God,'' pick up the phone, call
these bankers, and say, ``I am supposed to protect this company
from liability, and there is a lot of liability that could
result from these allegations if these allegations are true.''
I don't understand why you didn't feel a responsibility to
Enron and stockholders to make those calls right away and find
out what was really happening, not just taking Andy Fastow's
word for it.
Mr. Dilg. You have to understand, Mr. Chairman, that in the
context that the preliminary review was conducted, Mr. Skilling
had just resigned from the company. There was a great deal of
speculation in the market and with Enron's counter parties as
to the reasons for Mr. Skilling's resignation. We were trying
to develop the facts that we could by talking with people
inside the company so as not to create lots of speculation and
rumors until we knew what we could report to Mr. Derrick.
Again, the people that we interviewed indicated that they
had seen no business arrangements that were contrary to Enron's
best interest coming out of this, or any indication that banks
were getting more favorable deals than they should have gotten
due to a linkage with LJM. And the person in charge of the
banking relationships at that point in time denied there was
any linkage.
Mr. Greenwood. Well, it sounds like what you are saying is
that the preliminary review also had, as part of its purpose,
not just a preliminary review but you didn't--this was to be a
hushed review because of the concern that Skilling's departure
created a lack of confidence in the company. And if you took
the review outside the walls of Enron, that to really get to
the bottom of it, that it would have some negative short-term
consequences for Enron when, in fact, what you might have done
is prevented some very, very serious long-term consequences.
My time has expired. The Chair recognizes the gentleman
from Florida, Mr. Deutsch, for 10 minutes.
Mr. Deutsch. Thank you, Mr. Chairman. I am going to read
just a couple of sentences from Ms. Watkins' letter. ``Looking
at the stock we swapped, I also don't believe any other company
would have entered into the equity derivative transaction with
us at the same prices without substantial premiums from Enron.
In other words, the $500 million in revenue in 2000 would have
been much lower.''
Which is really the contention that I have said in terms of
the fact that these transactions did not serve a business
purpose. And if we accept her premise, that is the issue.
And, you know, as I mentioned in the introduction, Mr.
Derrick, if you can comment, you know, on the Rhythms
transaction, just the structure of it, as a general partnership
set up to sell back to Enron the stock--I mean, the outside--if
they had done that with an investment bank there would be no
question that they can do it. But setting this up as an off
balance sheet, were you personally involved with approving this
or involved with understanding it?
Mr. Derrick. No, Congressman. I had no personal involvement
in the structure. That would have been--in terms of the legal
work with respect to that, that would have been done by the
lawyers who I think at that time were in Enron North America.
And, of course, the business aspects of that would have been
handled by the business individuals who were part of
structuring the transaction, but I had no personal involvement
in that.
Mr. Deutsch. So you--again, we are trying--today's hearing
was--the purpose of sort of trying to, you know, have the top
dogs, you know, in front of us. So it would not have come to
your attention. I mean, specifically, is there anyone here--you
know, again, Mr. Astin, would you be aware of who would have
approved this?
And, Mr. Derrick, I mean, who specifically--so our staff at
least can follow up. I mean, who specifically would have
approved the structure of this transaction?
Mr. Derrick. Well, from the Enron side, Congressman, I
can't say with certainty. I would think that it would have been
Ms. Mordaunt or someone in the legal group in which she was
involved who was working with Ms. Mordaunt.
And let me make it clear that I was at the Executive
Committee--well, I am sorry. I was at the--I would have been at
a Board meeting in which that was presented, so I don't mean to
say that I have not heard of this matter. But in terms of
having any detailed knowledge about it, or having been
personally involved in the structure of it, I was not.
Mr. Deutsch. Mr. Sefton, as a former General Counsel as
well, I mean, are you aware of the--who approved this
transaction, or any--or the structure of it?
Mr. Sefton. This transaction was completed before I started
my position in Global Finance.
Mr. Deutsch. And Mr. Astin?
Mr. Astin. Congressman, I had a very limited role in
providing some initial securities disclosure-related advice to
Ms. Kristina Mordaunt, with regard to this transaction. I did
not work on the structuring of it. I did review the first draft
or so of a partnership agreement, just to----
Mr. Deutsch. So who at Vinson & Elkins would have approved
this transaction?
Mr. Astin. No one. We didn't work on the transaction except
as I have described.
Mr. Deutsch. And would that be typical, that in-house
counsel would have basically--so now we are looking for Mrs.
Mordaunt, and our staff at least can question her. I mean, is
she, on her own, the person who basically said--you know, gave
it the, you know, legal Good Housekeeping Seal of Approval that
it is okay. Mr. Derrick?
Mr. Derrick. Well, again, I don't--specifically, with
respect to this transaction, I don't know, Congressman. Let me
say under our corporate governance rules, every transaction
that would have constituted a binding obligation on the part of
Enron would have required the signoff, and should have the
initials of, the attorney who approved that transaction.
Now, in many of our transactions, not literally every one,
but in many of our transactions there would have been an
outside firm also working with the in-house group. As Mr. Dilg
just pointed out, Enron used a great many law firms. I don't
know whether another law firm was specifically involved in this
transaction or not.
Mr. Deutsch. All right. And, again, this is one of 4,000
partnerships. It is one of the largest. It is not the largest.
As you well know, you booked--or Enron booked a $390 million
gain on the Rhythms stock. So it is not a small, you know,
transaction. I mean, it--so I guess I--if you are not aware,
you are not aware. You are not aware of any specific outside
counsel that would have been involved in this transaction.
Mr. Derrick. No, I am not. But that is not to say that that
information is not available. It certainly should be.
Mr. Deutsch. Do you understand this transaction and how it
was set up?
Mr. Derrick. No, Congressman, I can't explain the
transaction, because, again, I had no personal involvement in
it.
Mr. Deutsch. I don't know if I want to ask you to give a
legal opinion, because maybe I can, you know, explain it a
little bit. Let me go more specifically as part of this--Mr.
Fastow, who obviously remained as the chief financial officer,
was also the general partner. My understanding is that at the
Board meeting it was the understanding of the Board that he was
not to receive any compensation for his work as the general
partner. Is that your understanding as well?
Mr. Derrick. Well, I would have to look at the minutes of
that Board meeting specifically to truthfully answer that
question.
Mr. Deutsch. Was there any objection to him receiving
compensation as general partner to these types of transactions?
Mr. Derrick. The only Board meeting at which I was in
attendance related to the LJM1 transaction, which I believe was
the hedge of the Rhythms transaction. And I do believe that
there was a discussion by Mr. Fastow of the proposed
compensation structure and that attached to the minutes of that
meeting would be a slide which does explain whatever was
explained at the meeting with respect to his proposed
compensation.
Mr. Deutsch. Were you aware of the conflict of interest
role that Mr. Fastow had regarding his role in LJM
partnerships?
Mr. Derrick. Yes. And the very purpose of presenting that--
well, let me say, as you undoubtedly know by now, under the
Enron code of conduct, our code of ethics, conflicts of
interest are not prohibited. It is provided--there is a
procedure provided in the code of conduct that requires that a
conflict of interest be presented to the chairman and chief
executive officer. It actually is not required to be presented
to the Board, although in this case it was.
And the very purpose of having that discussion, as I
recall----
Mr. Deutsch. All right. So, really, you were trying to put
in a meaningful system to put in place to guard against
potential conflicts of interest with Mr. Fastow.
Mr. Derrick. Exactly. That is right.
Mr. Deutsch. And it was a serious conflict that you
expected and a suitable system was supposed to be in place?
Mr. Derrick. Well, with respect to LJM1, I was not present
at the Board meetings where the LJM2 structures were discussed.
As I recall, LJM1, Congressman, was actually looked at as a--at
the time as basically one transaction to put in place a hedge
to protect the value of the company.
Mr. Deutsch. How was the conflict system supposed to
operate?
Mr. Derrick. Under our code, any employee who has a
conflict of interest is required to present that to the
chairman and chief executive officer. It is then up to that
individual to make whatever decision he or she believes is
appropriate. There is no formal requirement for it to be sent
through----
Mr. Deutsch. I am asking questions because--again, I have
10 minutes, so I really do need----
Mr. Derrick. I am sorry.
Mr. Deutsch. [continuing] to go relatively quickly. Let me
just ask you, in the LJM deals, there was a structure where
there is a multi-name signature block. Why was that set into
place? And, again, the specific information we have now is that
it was not followed through on a continuous basis. That Mr.
Skilling specifically did not sign, you know, continuously
those approval sheets, and yet the transactions were approved.
Mr. Derrick. I will have to defer, in large part, I think
to the lawyers in the Enron Global Finance Group who were
charged with that. I don't recall having any specific
involvement in setting up those approval sheets. And I don't
recall at the time that the Rhythms transaction was being
discussed, Congressman, that there was such an approval sheet.
Mr. Deutsch. Did you understand the system that it was
supposed to include these approval sheets?
Mr. Derrick. At the time of the Rhythms transaction, there
was no approval sheet.
Mr. Deutsch. What about LJM2?
Mr. Derrick. As LJM2 was developed, my understanding is
that the Enron Global Finance Group, in conjunction with----
Mr. Deutsch. The bottom line is, did you know that these
approval sheets were part of the system that you had supposedly
implemented to avoid conflict?
Mr. Derrick. Yes, at some point.
Mr. Deutsch. Okay. And did you know that Mr. Skilling did
not sign them on a continuous basis?
Mr. Derrick. My first awareness of that came in my
conversations with Mr. Mintz, who raised the issue that there
was not contemporaneous----
Mr. Deutsch. So who was guarding the store? Who was the cop
watching what was going on? I mean, not internally, not
externally. I mean, you set up a system which apparently no one
followed.
Mr. Derrick. Well, I think that--I am not sure that that is
correct, Congressman. There was a system that was set up, I
think, designed in good faith to deal with these issues. The
question that everyone was looking at is: was the system
appropriately adhered to? But that responsibility was allocated
by the Board to Enron Global Finance Legal, as well as to our
chief accounting officer and our chief risk officer.
Mr. Deutsch. Let me go back to the--do you have the chart
again? Let me just go back to it. Just because, again, we are
not--sometimes I just have found it easy to focus on the
specific transaction. I am going to do my best to try to
explain this, that on the Rhythms transaction, as I said, the
stock value went up about $390 million is my understanding.
Enron made a corporate decision to basically lock in the price,
they wanted to buy it put to do that.
Mr. Fastow set up the partnership to sell that put back to
Enron. It was capitalized by Enron stock right here. As soon as
he set up the general partnership, he took out a several
million dollar general partnership fee. That was actually the
first thing that he did.
He then sold the put back--actually, the general
partnership set up a swap as a subsidiary, which was actually
done improperly, because by taking out the general partnership
fee it had less equity than was needed for a 3-percent set-
aside. But they sold it back.
The problem with the transaction is two things. One is the
general partnership never could have made good on the put. I
mean, basically, Enron bought a put from itself in this
transaction. And, effectively, that is what occurred. And that
is the point of what I am saying that we--that at least in my
opinion this transaction is illegal. It is illegal because a
business purpose is not there.
The business purpose--the purpose, as far as I can see, is,
No. 1, to enrich Mr. Fastow as the general partner to take the
fee, No. 1. No. 2, to basically manipulate the stock price,
because what you have done is you have booked the gain, the
$390 million gain. The liability that that stock might go down
is not listed as a liability anywhere.
So this is the point, you know, of why it is legal and
where the problem comes in--is that an outside auditor, or
someone--the public, an analyst--looking at the books, unless
they can get inside of this transaction, does not understand
what occurred. And I can't, you know, for the life of me--and
no one--and I have used this chart with other people to try to
come up with, why is this a legitimate transaction?
What is legitimate about this, except maybe, you know, if
this was, you know, Goldman Sachs, then it would be legitimate,
because they would be selling a put. But Mr. Fastow didn't go
to Goldman Sachs to buy the put. He bought the put from
himself. And, in fact, what continues in this transaction is
that it was capitalized, as I said, by Enron stock, literally
given by Enron stock, when both the Rhythms net and Enron stock
went down without consideration.
Enron then gave, at Mr. Fastow's request, an additional--I
believe it is $150 million of additional stock to this general
partnership without consideration. Without consideration.
Without showing that as a liability on the balance sheets. And,
again, what is significant about this, as we have delved into
these partnerships, is basically this is one of many. I mean,
this is one of the largest. It is not the largest. And this is
the structure.
Again, we talked about how Enron did all of these
complicated things. This is not so complicated. It really isn't
that complicated. And this is the structure, apparently, that
was continuously used by Mr. Fastow in the LJM partnerships.
Very similar. There were different products. You know, it could
have been a pipeline that had a value, and they locked in the
pipeline.
But essentially, I mean, our understanding is this was a
game. And, I mean, from your perspective as general counsel, I
don't see how you weren't aware that this was the game. And if
it was the game, then try to explain to me why it was a legal
game and why this whole thing was not a scam from day one, why
it wasn't, you know, basically thieves in blue suits and red
ties. And, really, that is what this whole thing is about.
And I think that is the question which is going on, because
the issue that I think we go back to is Enron's demise is not
business as usual in America. There have been several companies
since Enron's bankruptcy in America that have gone bankrupt. K-
Mart has gone bankrupt. Other companies have gone bankrupt. Big
companies. Not as big as Enron, but the reality is that the
public markets knew that there were problems with those
companies.
The reality is in the case of Enron, until Enron vaporized,
the public markets did not really know of the level problem.
So, Mr. Derrick, I really want to at least give you the
opportunity, because if you can--if you can respond.
Mr. Derrick. Well, Congressman, I will attempt to respond
to the best of my ability. As I mentioned earlier, I was not
involved in the structure of that transaction, and I can't
speak to the details of it. I will say, to the best of my
recollection, that it was certainly considered at the time that
the Board approved that there was a legitimate business
purpose, and that was to help ensure that the shareholders of
Enron would be able to retain as much value as possible with
respect to the investment that had been made in Rhythms.
As to what later transpired, I can't speak to that. I have
not certainly been told, and was not aware, that these
structures had been considered to be illegal. I know that there
are great concerns with respect to the appropriate accounting
treatment, but I was not aware that anyone had challenged the
actual legality of the----
Mr. Deutsch. Is that within Enron or within your outside
counsel, or am I the first person to suggest to you that they
are illegal?
Mr. Derrick. Well, I don't claim to have read everything
that may be out there, Congressman. But my understanding is
that the concern here has been primarily related to whether the
appropriate accounting treatment was followed----
Mr. Deutsch. Is it an SEC violation to have a non-business
purpose in terms of that? That that is a violation? That is a
criminal violation?
Mr. Derrick. Well, again, my----
Mr. Deutsch. I mean, if it is a non-business purpose, it is
a criminal violation. People will go to jail.
Mr. Derrick. My understanding at the time that the Board
approved this was that it was certainly considered to have a
legitimate business purpose--that is, to protect the value of
the Enron shareholders and their investment in Rhythms.
Mr. Deutsch. Okay.
Mr. Greenwood. The time of the gentleman has expired.
The Chair recognizes the Chairman of the full committee,
Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Dilg, on October 30 when Sherron Watkins met with Ken
Lay and provided him with the memo that we have as a part of
our record, she listed two mistakes, apparently. One was that
Lay should have appropriately taken the matter seriously in the
beginning of the investigation. However, mistake No. 2 she
lists, ``is that he relied upon V & E and Arthur Anderson to
opine on their own work.'' And she quotes your statement on
October 16 to her when supposedly Sherron Watkins said to Lay
that he should probably come clean and admit the problems and
restate the 2000 Raptor in order to preserve his legacy and
possibly the company. And your statement was, are you
suggesting that Ken Lay should ignore the advice of his counsel
and the auditors concerning this matter? She was apparently
complaining when she went to Mr. Lay, he made the mistake and
relied upon the very same law firm that had done the work on
these transactions, to comment on their work and to comment on
the criticisms of that work instead of hiring outside counsel
and outside auditors and that you indicated to her that Ken Lay
should simply continue to take the advice of his counsel and
his auditors concerning this matter.
Was that an accurate statement to Mr. Lay on October 30?
Mr. Dilg. I don't have a copy, I don't believe, of that
memorandum Chairman Tauzin.
Chairman Tauzin. I'll put it in front of you right now.
Mr. Dilg. Thank you very much.
Chairman Tauzin. I have the cite, but here's an actual copy
and you can see where I've underlined it. She's basically
saying it was a great mistake for him to end up relying upon
your firm, to comment on your firm's work. And that you said,
are you telling me that Ken Lay shouldn't rely upon his counsel
and his auditors? Is that accurate?
Mr. Dilg. I don't remember making that specific statement.
Chairman Tauzin. You do remember, however, filling a report
out on October 15 that you and I believe Mr. Mark Hendricks,
III, prepared for Mr. Derrick. Is that correct?
Mr. Dilg. Yes sir.
Chairman Tauzin. And in that report your conclusions are
that your ``preliminary investigation do not, in our judgment,
warrant a further widespread investigation by independent
counsel and auditors.'' Is that correct?
Mr. Dilg. That's correct.
Chairman Tauzin. Do you stand by that decision?
Mr. Dilg. Yes sir.
Chairman Tauzin. You also say that while there's some bad
cosmetics involved that your response to the response of Mr.
Derrick should be to Ms. Watkins that ``we should assure her
that her concerns were thoroughly reviewed, analyzed and were
found not to raise new or undisclosed information given serious
consideration.'' Is that correct?
Mr. Dilg. Yes sir.
Chairman Tauzin. But if we look at the beginning of your
report and this is where I want you to comment, Mr. Derrick,
because this is a letter to you, and obviously the ``you'' in
this sentence refers to you, Mr. Derrick.
In preliminary discussions, the second page of the report,
in preliminary discussions with you, it was decided that our
initial approach would not involve the second guessing of
accounting advice and treatment provided by Arthur Anderson,
that there would be no detailed analysis of each and every
transaction and there would be no full-scale discovery style
inquiry. Instead, inquiries should continue to determine
whether the anonymous letter and supplemental materials raise
new factual information that would warrant a broader
investigation.''
Isn't it true, Mr. Derrick, that while Mr. Dilg is writing
a report advising you to tell Ms. Sherron Watkins that you've
given her complaints thorough--I want to quote you accurately,
``thoroughly reviewed, analyzed'' although you were being told
by Mr. Dilg to tell Ms. Watkins that her complaints were
thoroughly reviewed and analyzed. But nevertheless, you gave
instructions to Mr. Dilg and Vinson & Elkins not to do that.
You told them, according to his, letter, don't look at the
accounting treatment, don't look at these transactions in
detail and for heavens sake, don't do a full style discovery.
Isn't that correct?
Mr. Derrick. Chairman Tauzin, if I understand your question
correctly, this goes to the point that I was speaking to in my
opening remarks which is in the context of last August, recall
that as the Powers Report indicated, despite the fact that
there were literally hundreds of people who were involved in
these transactions and despite the fact that under the Enron
Code of Conduct, there are three different ways of reporting
anonymously any concerns that one may have to the company which
does trigger an investigation.
To the best of my knowledge, the only report that had been
presented on this issue was that at the time it was an
anonymous report. We took this extremely seriously. The
question was at the time do we launch into--and this was not
something I instructed Vinson & Elkins. This was part of our
initial discussions.
The question was how do we, as promptly, as practical----
Chairman Tauzin. Mr. Derrick, Sherron Watkins met with Mr.
Derrick and Mr. Rogers, 3 days before the 15th. You can't
possibly sit here and tell me that you thought this was still
an anonymous complaint.
Mr. Derrick. I'm saying at the time that we received the
initial report, it was an anonymous letter. Obviously, at some
point and I can't recall exactly which day that would have
been, but yes, at some point we certainly understood it was Ms.
Watkins, but I don't know her.
Chairman Tauzin. I want you to explain to us, because I'm
totally--I can't understand for the life of me why the general
counsel of this corporation, when he's approached by Ken Lay,
when Sherron Watkins meets with you, Mr. Rogers, to go over all
this stuff, not anonymous any more, why you when asked to
considered her request that outside counsel, she says this is
our recommendation in an initial letter. Involve Jim Derrick
and Rex Rogers to hire a law firm to investigate the Condor and
Raptor transactions to give Enron attorney-client privilege on
this work product, can't use V & E due to conflict. They
provided some true sale opinions on these deals. Why, when Mr.
Lay comes to you and says I need to know whether all this is
true, why you turn right around and get Vinson & Elkins to do
this extraordinarily limited investigation and instruct them
don't look at the accounting treatment and don't do a full-
scale discovery style inquiry and by the way, I should look at
the next paragraph where Mr. Dilg, you point out that you only
looked at selected documents, provided you by Enron.
It appears to me, Mr. Dilg, Mr. Derrick was severely
limiting your ability to examine whether or not, No. 1, Sherron
Watkins' allegations were correct, because you were told not to
look at them. And two, whether anybody else really ought to
look over your shoulder and see whether or not Vinson & Elkins
had done a good job in recommending these deals when you issued
approval letters on them.
Is that correct?
Mr. Dilg. I don't believe that we were instructed to be
limited, Chairman Tauzin.
Chairman Tauzin. I'm reading your statement, Mr. Dilg.
Listen, let me read it again. ``In preliminary discussions with
you, Mr. Derrick, it was decided''--sounds like both of you
talked about it and decided together that our initial approach
would not involve the second guessing of the accounting advice
and treatment provided by AA. And there would be no detailed
analysis of every transaction. And there would be no full-scale
discovery style inquiry. And second, that you would only review
selected documents. You're trying to tell me that wasn't an
extraordinarily limited review of Sherron Watkins' complaints?
Mr. Dilg. I think the sentence you read did talk about our
initial approach and again the scope of our review was to
determine whether a further, more detailed----
Chairman Tauzin. How could you know whether a further
review would be required if you wouldn't even look at her
allegation? How could you, the attorneys who advised the
corporation on these deals, how could you possibly give the
company objective information as to whether or not an outside
counsel or an outside auditor ought to look at them if he never
even looked at the deals again?
Mr. Dilg. Ms. Watkins was raising some very serious
business concerns that she wanted Mr. Lay to review and be
aware of. We didn't feel that that involved and there is
nothing in her letter----
Chairman Tauzin. Did you even bother to interview Skilling?
Mr. Dilg. Mr. Skilling was no longer with the company.
Chairman Tauzin. But you never tried to interview him?
Mr. Dilg. No sir.
Chairman Tauzin. You never asked him about the so-called
handshake deal where he promised that the partnership would be
protected with Enron stock, they would never lose money?
Mr. Dilg. No sir.
Chairman Tauzin. You just asked Fastow about it, he denied
it and that was enough?
Mr. Dilg. He denied it. If there was a concern from the
company's standpoint, Mr. Causey said that he was not aware, I
believe Mr. Causey said he was not aware of any such
transaction and----
Chairman Tauzin. Ms. Watkins says that employees were
asking this all the time, that people were saying that, that
many similar comments are made when you ask about these deals.
Employees quote our CFO as saying these are handshake deals.
But Skilling and LJM will never lose money. Did you ever try to
find out who these employees were who said that Fastow actually
told them that he had such a handshake deal?
Mr. Dilg. We did interview Ms. Watkins and she said a lot
of it was rumors that she had heard. She did give us some names
of other people that we should talk to on this specific aspect.
Chairman Tauzin. Did you talk to them?
Mr. Dilg. We did not.
Chairman Tauzin. You didn't bother chasing down that
allegation. You didn't talk to Mr. Skilling. You lived by Mr.
Derrick's and your agreement not to look at the deals, not to
do any discovery-style inquiry and you reported quite
conveniently to Mr. Lay and Mr. Derrick that everything is
okay, just cosmetic and tell Ms. Watkins that we looked at
everything and she should go away. In fact, you did more than
go away. This is a remarkable piece. This is a memo--Mr.
Derrick, I want to ask you about this one. This is from someone
who works in your office. This is from Ms. Sharon Butcher. It's
to Sharon Butcher from Vinson & Elkins from Carl Jordan, but
the letter is per your request. Some way or another, someone
who worked for you, Sharon Butcher, made a request to Vinson &
Elkins and she made two requests apparently. ``Per your
request, the following''----
Mr. Greenwood. It's Tab 4 in your books in case you need
to----
Chairman Tauzin. Tab 4 in your books. From Carl Jordan,
August 24, 2 days after--I mean this is right about the time
all this is coming about, to Sharon Butcher in your office, Mr.
Derrick. Which says, ``per your request, Sharon'', so Sharon
must have asked for this information. ``Here are some thoughts
on how to manage the situation with the employee who made the
sensitive report'' and there are all kind of thoughts about how
thank God she's asking for reassignment herself. You can see
she wanted a new job. And then the second one, you also ask
that I include in this communication a summary of the possible
risks associated with discharging or constructively discharging
employees who report allegations of improper accounting
practices. Did you, Mr. Derrick, instruct Sharon Butcher to
make such a request on Vinson & Elkins?
Mr. Derrick. Yes, I did, Congressman.
Chairman Tauzin. Explain to me why.
Mr. Derrick. Well, under our Code of Conduct, any employee
who makes an anonymous report is guaranteed that there will be
no retribution by the company, that the company will not
tolerate any form----
Chairman Tauzin. Why did you need the lawyers to tell you
what the risk of doing something you knew you couldn't do?
Mr. Derrick. We wanted to be absolutely correct in every
way----
Chairman Tauzin. That's a fine answer. You want to be
absolutely correct. But let me ask you again what I asked you.
If you already knew that your code of ethics prohibited you
from discharging her, why on earth would you instruct one of
your employees to ask Vinson & Elkins about what would happen
if you did that, what the risks were to the company, including,
for example the SEC might have some questions about that and
that you might have problems with other oversight agencies of
the government if you did that. Why would you even want to ask
Vinson & Elkins to give you a list of all the horrible things
that would occur if you knew you had no right under your own
code of ethics to discharge this employee?
Mr. Derrick. That gives us any information that we would
need, Congressman, as a legal department, in order to be in the
best position to protect any potential harassment or
intimidation of Ms. Watkins. We had absolutely nothing other
than her interest and the company's interest in acting properly
in this regard. Not only was that the right thing----
Chairman Tauzin. Mr. Derrick, you came from Vinson &
Elkins, didn't you?
Mr. Derrick. I certainly did.
Chairman Tauzin. So you're the lead counsel for Enron. The
guy Mr. Lay turns to to get help with these allegations.
Mr. Derrick. Correct.
Chairman Tauzin. Formerly with Vinson & Elkins. You turn
back to Vinson & Elkins to investigate it, but you tell them
don't look too hard. That's the common sense review of what
I've just read to you.
How do you explain that?
Mr. Derrick. I would respectfully disagree with that
construction, Congressman. As I mentioned, Mr. Lay and I both
proceeded in absolute good faith to take Ms. Watkins'
allegations extremely seriously. What you were pointing to as
the downside of Vinson & Elkins was also the great strength of
Vinson & Elkins----
Chairman Tauzin. Why did you tell them not to look at the
deals--why did you tell them not to do a thorough discovery-
style inquiry? Why did you tell them not to do that?
Mr. Derrick. Let me say again I did not instruct them to do
that. That was part of our initial discussion in how best to
proceed with a preliminary investigation. It was always the
purpose of this investigation that the recommendation to engage
an additional accounting firm could well have been made.
Chairman Tauzin. My time is up, but I want to make it
clear. You call this a preliminary investigation, but it's the
only one you did, right? It's the only one Vinson & Elkins did,
the only one you did, right?
Mr. Derrick. We followed the recommendation that we
received from the outside firm----
Chairman Tauzin. From Vinson & Elkins saying we don't think
anybody ought to overlook our work and check it. Did that
surprise you that Vinson & Elkins would tell you we don't think
anybody has to look at what we did to see if it's legally
correct?
Mr. Derrick. I have the utmost faith in Vinson & Elkins and
in their integrity. I believe that they had truly believed that
we should have proceeded----
Chairman Tauzin. You knew that Vinson & Elkins were the
attorneys on the Raptor deal.
Mr. Derrick. As I said, Congressman, I don't know that I
was aware that they were attorneys on all the deals, but we
were certainly aware that they had been involved in the
transactions which gave them the great ability to quickly start
on the investigation.
Mr. Greenwood. The time of the gentleman has expired. The
chair is about to recognize the gentlelady from Colorado, but
before I do just one question, Mr. Dilg. Your preliminary
investigation was not a cover up, was it?
Mr. Dilg. It was definitely not a cover up.
Mr. Greenwood. In what ways would a cover up look different
than your preliminary investigation?
Mr. Dilg. I'm not sure. I've never participated in a cover
up, Chairman. Again, you need to take our preliminary report in
the context of what Enron was doing at the time in terminating
the Raptor transactions and having already removed Mr. Fastow
from the conflict of interest position.
Mr. Greenwood. The chair recognizes the gentlelady from
Colorado for 10 minutes.
Ms. DeGette. Thank you so much, Mr. Chairman. Mr. Derrick,
I'm sure you didn't mean to imply to the chairman that you gave
any less shrift to the allegations being made by Ms. Watkins
because they were initially made anonymously, did you?
Mr. Derrick. To the contrary, Congresswoman----
Ms. DeGette. I'm serious, didn't you.
Mr. Derrick. We absolutely did.
Ms. DeGette. Thank you. Now also, I'm sure that when you
asked Vinson & Elkins to do an investigation, you yourself
didn't intend to have them do a cover up, did you?
Mr. Derrick. My integrity is not for sale, Congresswoman. I
would not participate in a cover up.
Ms. DeGette. Thank you. So you thought that they would do
an independent investigation.
Mr. Derrick. Yes, I did.
Ms. DeGette. Is that your testimony?
Mr. Derrick. Yes.
Ms. DeGette. Thank you. Now Mr. Dilg, in your written
testimony, you point out to us very helpfully that Enron's
legal affairs were directed by a highly sophisticated in-house
legal department consisting of approximately 250 attorneys,
some of which by the way, came from your organization, correct?
Mr. Dilg. That's correct.
Ms. DeGette. And so for most of the financial transactions,
your lawyers would interface with the in-house attorneys and
also, by the way, with Arthur Anderson who provided the
auditing and accounting advice for Enron, correct?
Mr. Dilg. We would usually interface with the legal
department. I'm not sure that we would interface with Arthur
Anderson.
Ms. DeGette. You assumed that the in-house lawyers were
interfacing with Arthur Anderson for routine transactions,
right?
Mr. Dilg. I'm not sure it would be the in-house counsel as
much as it would be the in-house financial department or
accounting department.
Ms. DeGette. So you don't even know if the in-house lawyers
were working with Arthur Anderson on these issues?
Mr. Dilg. That's correct. I do not know.
Ms. DeGette. As far as you know, there may have been no
lawyers working with Arthur Anderson?
Mr. Dilg. That could be.
Ms. DeGette. Mr. Derrick, do you know if your lawyers
worked with Arthur Anderson?
Mr. Derrick. I can only say that I personally did not work
with Arthur Anderson. It wouldn't surprise me----
Ms. DeGette. You were the head of the legal department. Do
you know whether any of your lawyers worked with them?
Mr. Derrick. As I was going to say, Congresswoman, it
wouldn't surprise me that on some matters there was interface
between some in-house lawyers and Anderson. I personally was
not.
Ms. DeGette. If you wouldn't mind supplementing your
answer, find out if anybody did, that would be helpful in this
investigation.
Now Mr. Derrick, the investigation of Sherron Watkins'
claims, that was kind of a different assignment than the normal
assignments that you got, wasn't it?
Mr. Dilg. Is that question addressed to me, Congresswoman?
Ms. DeGette. I'm sorry. Yes, it is, Mr. Dilg.
Mr. Dilg. Yes, that was not a normal assignment as far as--
I'm a transactional lawyer.
Ms. DeGette. Did you understand that that was to be an
independent investigation of these claims?
Mr. Dilg. I understood we were to make a preliminary
review. We discussed----
Ms. DeGette. Did you think it would be an independent
preliminary review?
Mr. Dilg. It depends on--it's not an independent review
such that you would have to respond to a derivative suit or if
you were going to have an independent committee of the board
directing their own counsel.
Ms. DeGette. So you didn't think it was particularly
independent. The reason I'm asking this question is because and
we've talked about this at length with the chairman and others,
you limited the scope of the investigation right from the get
go. You said that you're not going to second guess Arthur
Anderson's accounting, right?
Mr. Dilg. We----
Ms. DeGette. Wasn't that one of your premises in the
investigation?
Mr. Dilg. In our preliminary review, we were not to review
the accounting.
Ms. DeGette. And in fact you never did review Arthur
Anderson's accounting, did you?
Mr. Dilg. No, we did not.
Ms. DeGette. Okay, the investigation team was you and Mr.
Hendricks only, right?
Mr. Dilg. That's correct.
Ms. DeGette. You didn't use any associates, right?
Mr. Dilg. That's correct.
Ms. DeGette. You didn't have any accountant helping you
with the investigation, did you?
Mr. Dilg. That's correct.
Ms. DeGette. So you would really have no way--I mean do you
have an accounting background?
Mr. Dilg. I do not.
Ms. DeGette. I don't know how you are, the way I am, before
I went to law school I had one accounting course in college. I
assume it's probably pretty much the same with you, is that
right?
Mr. Dilg. I believe I had two semesters of accounting in
undergraduate school.
Ms. DeGette. Okay. So you don't really understand
complicated accounting transactions or standards, do you?
Mr. Dilg. No ma'am.
Ms. DeGette. Do you know whether Mr. Hendrick does?
Mr. Dilg. I do not believe he does.
Ms. DeGette. So the two of you, you interviewed witnesses,
just the two of you. You never reviewed these transactions, did
you?
Mr. Dilg. No, we did not get into the details of the
transaction.
Ms. DeGette. Now you did know, didn't you, that Sherron
Watkins' allegations were that the accounting scandals were the
problem. Isn't that correct?
Mr. Dilg. She raised a number of different things in her
correspondence with Mr. Lay.
Ms. DeGette. Right, but I mean basically she said we will
implode in a way the accounting scandals and there's an
elaborate accounting hoax and then her supplemental information
indicated she thought there were accounting problems with a
number of the transactions, most particularly Raptor, correct?
Mr. Dilg. She was concerned about the Raptor transaction,
primarily.
Ms. DeGette. Right.
Mr. Dilg. Her main concern was that Mr. Lay, in coming back
in as CEO, thoroughly understand the issues he had with the
business issues of the vehicles unwinding 2 years hence and the
problems that might cause.
Ms. DeGette. If you'll excuse me, I've looked at--I assume
you reviewed all of her--both her letter of concern and also
the attached specific concern she raised, didn't you?
Mr. Dilg. Yes, we did.
Ms. DeGette. Well, because she says here about Raptor, the
accounting treatment looks questionable, and talks about equity
derivatives. ``The equity derivative transactions do not appear
to be at arm's length. There's a veil of secrecy. Employees are
questioning our accounting propriety'' etcetera. Aren't those
all issues around accounting?
Mr. Dilg. Yes. All those statements relate to accounting.
Ms. DeGette. Did you understand what those allegations
were?
Mr. Dilg. We understood her base allegation to be concern
about the fact that the Raptor vehicles were supported by Enron
stock and that Enron had hedged investments made against those.
Ms. DeGette. Right, and she had specific concerns about
specific transactions. Did you ever have any independent
accountant look at those transactions?
Mr. Dilg. We did not.
Ms. DeGette. Now, why not?
Mr. Dilg. Our charge for the initial review was to
determine whether there were facts sufficient for a further
review. We were not to review the accounting advice given by
the accounts that Enron's audit committee had decided to use
for accounting advice.
Ms. DeGette. If the allegation is that the accounting is
funny, and you rely on the accounting to come to your
conclusion, how can you conclude that there's not a problem
with the accounting without any kind of outside analysis?
Mr. Dilg. We were concerned with making sure that Arthur
Anderson had at their disposal all the material facts relating
to the transactions and we did try to verify that.
Ms. DeGette. And did you find that out? Did they?
Mr. Dilg. Yes.
Ms. DeGette. How did you find that out?
Mr. Dilg. We gave them Ms. Watkins' letter and walked
through with their engagement partners point by point under Ms.
Watkins' letter and----
Ms. DeGette. Did they have the information, so, from that
you concluded yes?
Mr. Dilg. They were very well aware of the issues that she
was raising and that they felt very comfortable with the
accounting decisions they had made in connection with the
transaction.
Ms. DeGette. Let me ask you this, did you ask Anderson to
provide you a detailed analysis of the allegations that Ms.
Watkins made in her memo, most specifically, the Raptor deals
and the other deals? Did you ask them for a detailed analysis
or did you just say, does this look okay to you and they said
yes, and that was it?
Mr. Dilg. We gave them the letter, I believe, a day or so
before a meeting that we had with Mr. Duncan and Ms. Cash. We
did not ask for a detailed, written analysis.
Ms. DeGette. So you don't know to this day what Arthur
Anderson's analysis would have been of the transactions that
formed the basis of Ms. Watkins' concerns?
Mr. Dilg. Arthur Anderson had included those transactions
in the scope of their overall audit of the company and they
confirmed to us verbally that they were still comfortable----
Ms. DeGette. This seems like an incredible circle to me.
She says well, there's problems with the audit, so you go ask
the people that did the audit. They say the audit was okay, so
it just comes back to point one.
How could you decide independently if it was true or not?
Mr. Dilg. We could not decide on whether the accounting was
correct. We're not in position to do that. We could decide
whether the Big Five accounting firm that the company's audit
committee had decided to rely on for accounting advice were
aware of the concerns and that they were still satisfied with
their accounting advice.
Ms. DeGette. But if the accounting--if the concern of the
whistle blower is that the accounting is wrong, then how can
you determine there's not a problem if you're relying on the
people doing the accounting to give you the analysis?
Mr. Dilg. I think Ms. Watkins' concerns, and I don't want
to speak for Ms. Watkins, but based on her letter and our
interviews were not with the technical accounting side. She
disagreed with the concept that you could support a transaction
with your own stock.
Ms. DeGette. Okay, let me ask you one more question. Now
you said here there's some problems with cosmetics. You thought
it might look bad, right, in your report?
Mr. Dilg. We laid out----
Ms. DeGette. You used that word, you said that there's some
problems with cosmetics.
Mr. Dilg. We did use the word cosmetics.
Ms. DeGette. But then you said you had some concerns that
there might be litigation as a result of this, correct?
Mr. Dilg. We had concerns that we expressed both in the
letter and in oral conversations that in the event of the
litigation, these transactions could be portrayed very badly.
Ms. DeGette. Well, actually, you said that you were
concerned that there might be litigation. Right? You said,
``there is a serious risk of adverse publicity and
litigation.'' That's the last page, page 9 of the October 15
letter.
Mr. Dilg. Yes.
Ms. DeGette. She's handing it to you right now.
Mr. Dilg. Thank you.
Ms. DeGette. Did you undertake any other, any further risk
analysis on behalf of your client, Enron, to let them know what
those litigation risks were so that they could rely on your
advice and conduct a narrow internal affairs?
Mr. Dilg. We did advise the company of the litigation risk.
Again, these were transactions that had been entered into by
the company some 18 months to 2 years before. There had been
serious declines in the market value of the investments that
had been hedged against them. The company terminated these
vehicles shortly after our initial meeting with Mr. Lay and Mr.
Derrick.
Ms. DeGette. Can I just stop you? We don't have any
document that would indicate the advice you gave to Enron
relating to the litigation risk. Does such a document exist or
did you give that advice verbally?
Mr. Dilg. It's here in the October 15 letter.
Ms. DeGette. So there's no additional documentation other
than this?
Mr. Dilg. There was an outline, I believe that the
committee has of our discussion of Mr. Lay and Mr. Derrick.
Ms. DeGette. But there's no additional memo about
litigation risk?
Mr. Dilg. That's correct.
Ms. DeGette. Thank you very much, Mr. Chairman.
Mr. Greenwood. The chair thanks the gentlelady from
Colorado and recognizes the gentleman from Florida for 10
minutes for purposes of inquiry.
Mr. Stearns. Thank you, Mr. Chairman. Mr. Dilg, I saw in
your opening statement, I just re-read it, you talked about
that you felt the lawyers that you dealt with with Enron were
highly capable, well qualified attorneys. Then you talked about
your relationship with Enron and you were proud of it. I think
that's what you said in your opening statement?
Mr. Dilg. Yes sir.
Mr. Stearns. In hindsight, do you think there's anything
you would have done differently dealing with Enron?
Mr. Dilg. I do not think so.
Mr. Stearns. So you would not have changed an iota of
anything that you did with Enron in your advising, in your
consulting, in your procedures with them?
Mr. Dilg. We performed a great deal of work on very many
projects for Enron over a long period of time. To my knowledge,
there's nothing that I'm aware of that we would change.
Mr. Stearns. Okay, so we've established the record that
everything you did during that time with Enron, you would do it
again, the same thing. Is that correct?
Mr. Dilg. From my personal standpoint, yes.
Mr. Stearns. This, to me is a little bit far fetched. If I
were you, I would say look, we made some mistakes. We're sorry,
we could have improved. There are some areas we could have
changed. But to come up here and say there's absolutely nothing
you would change, did you ever think about not continuing Enron
as a client?
Mr. Dilg. No sir, not until after the bankruptcy.
Mr. Stearns. So it took you to the absolute meltdown of
this corporation before you said we'll just not have Enron as a
client. Is that true?
Mr. Dilg. That's correct.
Mr. Stearns. And all during that time, there were no
indications to you that Enron was performing functions that
were illegal in your opinion?
Mr. Dilg. Never had any information that would indicate to
me that Enron was performing an illegal act.
Mr. Stearns. How much did you charge V & E for its
investigation of the Watkins letter?
Mr. Dilg. How much did we charge Enron?
Mr. Stearns. How much did V & E charge Enron for the
investigation of the Sherron Watkins letter?
Mr. Dilg. I don't have the precise figures. I believe it's
around $60,000. We conducted that very quickly.
Mr. Stearns. In your testimony, you define the role of
legal counsel. Let me just read from this. ``If a
transaction'', you say, ``is not illegal and has been approved
by the appropriate levels of a corporate management, lawyers,
whether corporate counsel or with an outside firm, may
appropriately provide the requisite legal advice.''
So if a transaction is not illegal, not illegal and it's
been approved by the corporate management, who determines
whether a transaction is legal or not? Isn't that your job?
Mr. Dilg. Based on the information we would have at the
time we were rendering the legal services, that's certain
advice that we would give.
Mr. Stearns. That kind of answer gets me concerned. If I
understand, the whole purpose of V & E is to take the facts
that are given to you, figure out if there is a legally
appropriate way to do it, isn't that what your law firm does?
Anderson comes to you, we want to do this, you show them how to
do it legally. Isn't that the whole purpose of your law firm?
Mr. Dilg. That is the type of advice we render on certain
matters, when we're asked. We do litigation matters. We do lots
of different things.
Mr. Stearns. I think every law firm in America is trying to
advise their clients what's legal to do. And you're saying that
you, as the counsel for Enron, never saw anything egregious
about anything they did during the entire relationship you had
with Enron. That's what you're telling us today?
Mr. Dilg. Yes sir.
Mr. Stearns. Now when Mr. Skilling came here, he gave
pretty much the same tact you have done, you know. I used the
term with him ``plausible deniability.''
I don't know if that term fits you, but the approach you're
taking here is total unrepentence, a feeling that you did
nothing wrong and that you and your entire legal firm with all
these high powered lawyers, never saw a red flag during the
whole process and you never thought about separating your
relationship with Enron until the meltdown and until the
bankruptcy. That's what you're telling us today.
Mr. Dilg. I believe the earlier question was whether we
ever saw anything illegal. That's what we're qualified to
determine. Red flag is a term that I'm not sure that I feel
comfortable with. But then again, it's to my knowledge we never
saw anything at Enron that we considered illegal. Our ethical
obligations would require us to withdraw if we did and if they
did not follow our advice in pursuing an illegal action.
Mr. Stearns. Mr. Sefton, prior to your coming here, I had
the opportunity to question Mr. Mintz, your successor. He
testified that when he saw virtually identical language that
was in the LJM2, identical language in the PPM for LJM3 in late
2000, he became very concerned. He was alarmed, because it
suggested that Fastow was promoting his access to inside
information as a way to promote investment in his partnership.
He raised his concern with Enron's legal team and V & E.
Mr. Dilg, did you know that he raised that? Mr. Mintz raised
that with you folks about his concern about Fastow's inside--
promoting his access to inside information? Did you ever know
about that? Just yes or no?
Mr. Dilg. I don't believe I recall any specific
conversations with Mr. Mintz.
Mr. Stearns. Mr. Sefton, did you know about Fastow and what
he was doing? Because you prepared the LJM2 papers, didn't you?
Mr. Sefton. No, I did not prepare those papers.
Mr. Stearns. Didn't you review them?
Mr. Sefton. I saw some of the documents relating to LJM2.
Mr. Stearns. How can you see some and not the entire
document? Do they come one page at a time?
Mr. Sefton. LJM2 was represented by Kirkland & Ellis which
was their outside counsel. They did essentially all the work on
putting that deal together.
Mr. Stearns. Well, did you review the private placement
memorandum?
Mr. Sefton. Yes, I did.
Mr. Stearns. And there was no concern by you on this, even
though your successor, Mr. Mintz, testified that he had great
concern about the PPM for LJM3 and yet you had no concern, is
that correct?
Mr. Sefton. I have never discussed with Mr. Mintz the
reasons for his concerns.
Mr. Stearns. Mr. Skilling did not sign any of these
documents. Should Mr. Skilling have signed some of these
documents?
Mr. Sefton. His signature was called for on the form, yes.
Mr. Stearns. When I go to a closing on my home, if I don't
sign the document, my lawyers says, ``Mr. Stearns, you better
sign this document or the deal is not going to be credible.''
Now your job was to review these partnerships, is that
correct?
Mr. Sefton. No, that's not correct.
Mr. Stearns. Okay. Did you see these partnership
agreements?
Mr. Sefton. No, I did not.
Mr. Stearns. But you just told me earlier that you saw a
part of LJM2?
Mr. Sefton. I saw the private placement memorandum.
Mr. Stearns. Okay, would you have discerned whether
Skilling signed or not that? Could you recognize in that he did
not sign it?
Mr. Sefton. I don't believe his signature was called for in
connection with the private placement memorandum.
Mr. Stearns. If you don't mind, pull the mike a little
closer.
Mr. Sefton. Sorry.
Mr. Stearns. Did you sign the approval sheets for the LJM2?
Did you sign them?
Mr. Sefton. Yes, I did.
Mr. Stearns. Now if you signed them that meant that you
were approving the LJM2 partnership, is that correct?
Mr. Sefton. That is not my understanding.
Mr. Stearns. So when you sign a document that's the
approval sheet, it's your understanding that that does not mean
it's an approval sheet?
Mr. Sefton. The approval sheet requires approval by Mr. Buy
and Mr. Causey. Those were the two senior executive officers of
the company who were required to approve the transactions by
the board of directors.
Mr. Stearns. Mr. Derrick, what was your role in helping the
board of directors understand the LJM transactions? As general
counsel, did you advise them on the controls they implemented
to avoid conflicts in doing business with LJM and did you
recommend that they implement any additional controls?
Mr. Derrick. Congressman, the only--best of my
recollection, the only board meeting that I was at with respect
to the LJM was the LJM1 transaction in which was viewed as
simply a on-off transaction. There were no controls, as I
recall the discussion at that point, because it was already a
deal that they were looking at specifically with a fairness
opinion.
With respect to the other LJM matters, I did not personally
participate in the controls and I was not at the meetings at
which LJM2 was----
Mr. Stearns. Mr. Derrick, I just have a little time left.
All of us on this committee are just having a difficult
understanding why Mr. Skilling didn't sign these documents and
why you, as a former general counsel of Enron didn't get a
concern when Skilling didn't sign these documents because I
would think part of your job as the former general counsel of
Enron is to make sure all the documents are properly signed.
Mr. Derrick. Well, Congressman, as we have said, we had
almost 250 lawyers in a decentralized department----
Mr. Stearns. You had too many people to enforce the signing
of the document?
Mr. Derrick. No, but the responsibility for that was
allocated by the board to Enron Global Finance and their
attorneys. Those were not documents that were toward me.
Mr. Stearns. Mr. Sefton, what's your comment?
Mr. Sefton. With respect to what?
Mr. Stearns. Documents that Mr. Skilling should have
signed, were not signed. Shouldn't that raise some flags?
Mr. Sefton. Yes, and it did.
Mr. Stearns. I mean because Mr. Derrick is saying you're
supposed to have done it, so he's bouncing--aren't you, Mr.
Derrick, bouncing the ball back to Mr. Sefton and saying Mr.
Sefton was supposed to do that? Isn't that what you just said?
Mr. Derrick. I don't mean to be bouncing balls,
Congressman. I'm just saying the board had allocated that
responsibility to a particular group, a legal group in our
organization.
Mr. Stearns. I would think the general counsel of Enron
might be that particular group you're talking about. So Mr.
Sefton, at this point I'm finding it hard to believe that you
wouldn't be involved in making sure all these documents were
properly signed.
Mr. Sefton. I'd like to just say that it was never my
understanding that the board delegated this job to Enron Global
Finance legal. That was never my understanding.
Mr. Stearns. Whose responsibility was it? If it wasn't
yours, whose responsibility? You ere the top poobah here, the
former--you were the counsel for Enron. I mean if you're not
responsible, the Global Finance, who else could there be?
Mr. Sefton. I believe the approval process called for the
business unit that was doing the transaction to complete the
signatures and get the signatures on the form.
Mr. Stearns. Well, Mr.----
Ms. DeGette. Will the gentleman yield real quick----
Mr. Stearns. I want to finish. The general counsel, Mr.
Mintz, I mean he tried. He said I sent him a memo in May 2001.
I gave him about a week to respond. This is Mr. Mintz saying. I
didn't hear from him. I asked my secretary to call his
secretary to see if I could get him on the schedule. He tried
and tried and tried. And Mr. Mintz was unable to get the
signature on the approval sheets. I mean who should he have
gone to? I mean aren't you the responsible one to help out
here?
Mr. Sefton. No, Mr. Mintz is my successor.
Mr. Stearns. Yeah. I mean you weren't aware of this problem
at all with Mr. Skilling? Are you saying today you had no
knowledge about Skilling not signing these documents, is that
your statement today?
Mr. Sefton. No, I'm not.
Mr. Stearns. You knew he didn't sign the documents?
Mr. Sefton. I know that his signature wasn't on all the
forms.
Mr. Stearns. Okay, so if they weren't on all the forms,
should they have been on all the forms? Just yes or no?
As a general counsel, should his name have been on the
forms, yes or no?
Mr. Sefton. I understand that the----
Mr. Stearns. No, just yes or no. Should they be on the
forms?
Mr. Sefton. Well, I'd like to answer by saying that the
approvals required by the board of directors required approval
by Mr. Buy and Mr. Causey and that's what the board said had to
be done in order to approve these transactions because of the
conflict of interest.
Mr. Stearns. No. I'm just asking your general, your legal
opinion here as a general counsel. Should Skilling's name have
been on those forms?
Mr. Sefton. The board did not call for that.
Mr. Stearns. So they don't have to be on the forms, is that
what you're saying?
Mr. Sefton. The board did not recall Jeff Skilling to sign
those forms.
Mr. Stearns. But you just told me earlier that his name
should have been on the forms. You just told me a moment ago.
Mr. Sefton. His signature was called for by the form
itself, but it wasn't required by the board procedures.
Mr. Stearns. Didn't you create the form? Who created the
form?
Mr. Sefton. I did assist in preparing the form.
Mr. Stearns. Assist, now wait a second. You created the
form, Mr. Sefton. You asked that his name be on that form. You
told me his name should have been on that form and it wasn't on
the form.
Mr. Sefton. No, I----
Mr. Stearns. That's the facts we've just established.
Mr. Sefton. No, I did not ask that his name be on the form.
Mr. Stearns. Who did, because you said his name should have
been. And you prepared the form, so who else could there be?
Mr. Sefton. Mr. Fastow suggested that Mr. Skilling's name
be added.
Mr. Stearns. And did you make sure that that name was added
in the nomenclature underneath saying blank line, Mr. Skilling?
Mr. Sefton. Yes, I did.
Mr. Stearns. So you had on the form that Mr. Skilling's
name should have been there. You prepared the forms. You said
he should have been on there. Now tell me why didn't you make
sure it was not on the form?
Mr. Sefton. Well, what I haven't mentioned to you is that
when I became aware of the fact that some of the forms had not
been signed by Mr. Skilling, I raised this issue with Mr.
Fastow and told him that there was an issue here that we needed
to deal with.
Mr. Stearns. Needed to deal with is probably a good way to
summarize this.
Mr. Chairman----
Ms. DeGette. Mr. Chairman, can I ask unanimous consent for
15 seconds?
Mr. Greenwood. Without objection.
Ms. DeGette. Mr. Rogers, in your position, did you think
that Mr. Skilling was supposed to sign those forms?
Mr. Rogers. Madame Chairman, let me reach over here. This
is pretty uncomfortable. Congresswoman, excuse me. I'm getting
off to a bad start. I think these processes for policies and
procedures for ensuring that these transactions with LJM were
not adverse to the best interest of Enron and that they were
arm's length----
Ms. DeGette. I asked a kind of a simple question. Can I get
kind of a simple answer? Did you think Mr. Skilling was
supposed to sign the forms?
Mr. Rogers. In the beginning, that was not my
understanding.
Ms. DeGette. Okay.
Mr. Rogers. That was an important factor for the Board.
When I said earlier, as these processes evolved and the in-
house counsel reviewed the policies and procedure to see how
they could be refined and improved, it was clear to me through
reading minutes of the board that the board considered Mr.
Skilling's approval to be important.
Ms. DeGette. Thank you. And so you thought he was supposed
to sign the forms as it went on?
Mr. Rogers. I did think he was supposed to sign the forms
as it went on.
Ms. DeGette. Thank you.
Mr. Greenwood. The time of the gentlelady has expired. The
chair would inform the witnesses and the members of the
committee that we have what appears to be a relatively brief
series of votes that we must address on the floor, so we will
recess now for at least 20 minutes and I can't give you a
precise time because of the uncertainty of the votes, but it
will be about 20 minutes.
[Off the record.]
Mr. Greenwood. The hearing will come to order. The chair
recognizes the gentleman from Michigan, Mr. Stupak for 10
minutes for inquiry.
Mr. Stupak. Thank you, Mr. Chairman. Mr. Dilg, just to ask
you some questions and you had indicated in your response that
there was this litigation risk and then you went on and said
that because of serious decline in the market that there would
be a litigation risk. Is that some quick summary of what you
said to Ms. DeGette, that there would a litigation risk because
of serious decline in the market?
Mr. Dilg. Right, Enron shares dropped possibly 60 percent
or so in the last year, at a point in time in August and in
September when we were writing this report.
Mr. Stupak. So as long as the market stayed up, Enron would
never be in trouble, is that correct?
Mr. Dilg. No sir, I don't believe that was the rationale.
Mr. Stupak. There wouldn't be any problem unless there was
lawsuits. The only lawsuits are going to come when people start
losing money. So all these transactions, partnerships, these
SPEs, that's okay, as long as the market stays up and Enron can
cover the cost? Is that sort of the conclusion of the
logarithm?
Mr. Dilg. No sir. The Raptor vehicles had had some very
severe losses hedged against them. I think it was Mr. Causey
that told us in our interviews that they were designed to deal
with volatility, not a complete collapse of market.
Mr. Stupak. Sure, they're supposed to hedge in case there's
a fall, and they're supposed to hedge, right, or put says Mr.
Deutsche likes to put it, right?
Mr. Dilg. That's as I understood the purpose of the
transactions.
Mr. Stupak. But puts and hedges are not legal, if you're
putting up your own company's stock as Enron did, correct?
Mr. Dilg. I don't believe that's correct.
Mr. Stupak. What do you believe is correct, if my statement
was incorrect?
Mr. Dilg. I believe there was a business purpose. The fact
that the vehicles were supported by Enron stock, we saw in our
review nothing that made them illegal because of that.
Mr. Stupak. So there was no business purpose to these SPEs,
is that what you're saying? That's what made them improper?
Mr. Dilg. No, I didn't say they were improper. The business
purpose, as I understood from Mr. Causey during our review was
that they were to hedge against volatility in some of the
stock, some of the investments that Enron had made.
Mr. Stupak. You know everyone up here at the table at least
all say I don't have an accounting background. I'm not an
accountant, you know. I only know the legal/technical merits.
But none of us on this committee has accounting backgrounds.
We're not accountants. We can figure out a few things and it
doesn't take a lot for us to figure out. We've only had 4 or 5
hearings. You guys have spent more time, in fact, with Enron
for many, many years. It seems to me, it seems to me that when
you get the memo from Ms. Watkins, and if you just took a look
at the letter, not even all the details. If you just read the
letter. It said Skilling's abrupt departure will raise
suspicions of accounting improprieties. I'm on 14 if you care
to follow along, second paragraph. ``Will raise suspicions of
accounting improprieties and valuation issues. Enron has been
very aggressive in accounting, most notably in the Raptor
transactions and the Condor vehicle. We do have valuation
issues with our international assets and possibly some of our
EES MTM positions.''
So her letter is more than just Raptor and Condor. If you
go down to the fourth paragraph, excuse me, fifth paragraph,
second line it says ``the value in the swaps won't be there for
Raptor. So once again, Enron will issue stock to offset these
losses. Raptor is an LJM entity. It sure looks to laymen on the
street that we're hiding losses in a related company and will
compensate that company with Enron stock in the future.''
So she's really just laying it out there. You don't need to
be an accountant. You don't need to be a Member of Congress.
She said a lay person on the street can understand this. The
problem I'm having and some of my colleagues are as we're
talking at the votes, all these smart attorneys up here, they
can't figure it out, but the lay person on the street can
figure it out. Our concern is what's the relationship here? If
you take a look at, if we just take a look at the table here, I
believe what, Mr. Derrick worked for many years for Vinson &
Elkins on the Enron account and you were at Enron, right?
Mr. Derrick. Right.
Mr. Stupak. So you have 25 years there at least.
Mr. Derrick. It was 20 years, Congressman.
Mr. Stupak. But Mr. Dilg, you replaced Mr. Derrick and
Vinson & Elkins. It just seems like such a cozy relationship
that even when you get a memo that says even the common lay
person on the street can figure it out, none of you guys can
figure it out.
Mr. Dilg. I'm not positive how to respond, Congressman. We
did understand that the Raptor partnerships were supported
largely by Enron stock. That was in Enron's disclosures in the
10(k) and 10(q)s, etcetera.
What I don't understand from your question is the assumed
illegality of that.
Mr. Stupak. Well, okay, I'm not asking for a legal
conclusion. You said you charged $60,000 to review the Watkins
memo. Now with that $60,000, I'm sure it's not just for your
technical, legal merit. I'm sure whatever rate you charge is
based upon reputation of the firm, common sense, knowledge. In
fact, you didn't go outside Enron because you guys had all the
knowledge and therefore it would be easier to do a good review.
I guess my concern is you bring all this experience and
expertise, but when we get to a real question, it's either I
don't have accounting experience or we didn't see the
technical/legal merit. You come and you're hired and you bring
other attributes with you as individuals, as attorneys and as
professional people. It seems like to some of us up here that
those other attributes were just a blind eye was cast when you
looked at this memo because it's all within the house. I would
think when you look at this memo words like ``aggressive
accounting, creative accounting'' would sort of send a signal
to someone with all this experience not only within Enron and
Vinson & Elkins, but even the lay person on the street, those
are red flags and we should take a more serious in-depth look
at it which you don't even hire an accountant, where admittedly
you say you're not an accountant. I would then think, as Ms.
DeGette was trying to say, you'd at least hire an account when
you have these red flags out here and you're charging this
company. There seems to be a circle that you don't want to
connect here.
Mr. Dilg. I do think our October 11 and our earlier
conversations with Mr. Lay and Mr. Derrick pointed out that the
accounting, even though Arthur Anderson said they stood by it
and still felt that it was proper, was aggressive and creative.
We did see that as a red flag and we did put that in our letter
to make sure that people understood that.
I think Mr. Lay and I'm not sure all the reasons that went
into it, but that may well have been one of the reasons they
terminated the Raptor transactions in the third quarter of
2001.
Mr. Stupak. Well, okay. Let me ask Mr. Rogers. You were
certainly throughout this year the vice president, associate
general counsel. Have you ever heard the words aggressive or
creative applied to any Enron accounting before?
Mr. Rogers. By anyone? I certainly heard of it----
Mr. Stupak. No, no. I mean before this whole mess started.
Is creative and aggressive accounting, is that proper
terminology you use?
Mr. Rogers. That's not terminology that I would use. I
hadn't heard that referred to with Enron's accounting
practices.
Mr. Stupak. What does aggressive and creating accounting
mean?
Mr. Rogers. I don't know what it means.
Mr. Stupak. How about Mr. Derrick, Mr. Dilg? Mr. Rogers
doesn't know what it means, but yet you guys used it in your
report. So what does it mean, aggressive and creative? Mr.
Derrick?
Mr. Derrick. Well, it actually was not my report,
Congressman, but no, I can't----
Mr. Stupak. It was a report to you from Vinson & Elkins.
Mr. Derrick. Right, I can't explain what aggressive and
creative accounting----
Mr. Stupak. What did you think of it then when they sent
you this report. You paid $60,000. They send you a report and
it says ``aggressive and creative.''
Mr. Derrick. I think the comfort that we took from the
report was that they had discussed these very things with
Anderson that we paid millions of dollars----
Mr. Stupak. Let's back to the words though. What did it
mean to you? What did it mean to you when you saw on page 7,
you got this report and you're anxious because there's some
allegations being made. You read it. You get to page 7, there's
``aggressive and creative accounting.'' Did you take great
comfort in that?
Mr. Derrick. It was, I believe, the following sentence
where it was no one had any reason to believe that the
accounting was not technically correct and they had discussed
these very issues with the firm that our audit committee had
determined was the appropriate accounting firm for the company.
Mr. Stupak. So even though you saw the words aggressive and
creative, you thought, oh, it's no big deal because Anderson
said it was okay?
Mr. Derrick. If the next sentence it says ``and by the way,
Anderson does not believe it's okay'' that would have been
obviously a great cause of concern.
Mr. Stupak. Mr. Dilg, you wrote the memo then. What did
aggressive and creative mean in accounting? What does that
mean?
Mr. Dilg. I'm not sure that we put a terminology on it,
Representative. We were reporting what we'd been told during
our interviews. I think Mr. Buy used the word aggressive.
Mr. Stupak. Mr. Buy did?
Mr. Dilg. I'm not sure. I need to look back through the
interview memos to see exactly where, but those words,
obviously, were things that we felt like we needed to convey,
even though Arthur Anderson said they were still satisfied with
the accounting and had reviewed Ms. Watkins' letter and the
allegation she made.
Mr. Stupak. But you'd agree that those aren't generally
accepted terminology we used in accounting, right?
Mr. Dilg. Uh----
Mr. Stupak. Again, you don't have to be an accountant to
answer this one.
Mr. Dilg. I don't believe they're part of generally
accepted accounting practices, but I understand that Arthur
Anderson was very convinced that these met generally accepted
accounting principles.
Mr. Stupak. All right. If you take a look at the report
there. Let me get the exact report here, the Powers Report. And
if you take a look on page 176, again, The Rogers Commission,
Report or whatever you want to call it, sees this very
different. If you look on page 176, it talks about the shared
Watkins letter. I'm quoting now, ``provided a road map to a
number of the troubling issues presented by Raptors.'' It goes
on next paragraph, ``We identified the most serious problems in
the Raptor transactions only after detailed examination of the
relevant transaction and most importantly discussions with our
accounting advisors. Both steps at Enron and V & E excepted,
would not be part of B & E's investigation. With the exception
of Watkins, B & E spoke only with the very senior people at
Enron and Anderson. Those people, with few exceptions, had
substantial professional and personal stakes in the matter
under review.'' That's the part that's probably troubling most
of us. This circle, as I spoke of, will you take a look at
these transactions, who's the approving legal counsel but
Vinson and Elkins? And you were asked to look at these
transactions that you had previously approved and yet you never
even had an accountant when you all say you're not accountants
even look at it. The closeness, the coziness of the
relationship is the part that's bothering a lot of us on this
committee.
Do you care to add anything to that?
Mr. Dilg. Only that we were asked to do a preliminary
review and we did talk to the people that Ms. Watkins laid out
in her letter to check with. I think she said to see if I'm all
wet.
Mr. Stupak. But preliminary review, I mean you did nothing
further after this.
Mr. Dilg. I'm sorry?
Mr. Stupak. You used the word ``preliminary review'' as
been established early. You really did nothing after this.
Mr. Dilg. Our preliminary review was to determine whether a
further review was necessary.
Mr. Stupak. And you determined there was no further review.
Mr. Dilg. And we believed at the time we gave the report,
no further review was necessary.
Mr. Stupak. Not even by accountants?
Mr. Dilg. I'm sorry?
Mr. Stupak. Not even by an accounting firm outside of
Arthur Anderson?
Mr. Dilg. Arthur Anderson, again, was one of the Big Five
accounting firms that had been chosen by the Audit Committee at
Enron.
Mr. Stupak. Right. All in-house, right? All in-house.
Arthur Anderson, in-house. They had attorneys in-house. They
had accountants in-house, right? And you never talked to any of
those people.
Mr. Dilg. We talked to the leading engagement partner for
Arthur Anderson.
Mr. Stupak. Head guy at Anderson. Those people had
substantial professional and personal stakes in the matter
under review as it says in the Powers Report, right? Those were
the people that were talked to.
Mr. Dilg. I don't know how they characterized the personal
stakes they had in it. They had the credibility of their
veracity on the line.
Mr. Stupak. They had a dog in the fight, let's put it like
that.
Mr. Dilg. We had no reason to believe that we couldn't
believe them.
Mr. Greenwood. The time of the gentleman has expired. The
chair recognizes the gentleman from North Carolina, Mr. Burr
for 10 minutes to inquire.
Mr. Burr. Thank you, Mr. Chairman. Mr. Sefton, let me ask
you, I would take for granted everybody at the table has kept
up with the hearings that have happened in the house and with
the publicity that exists around Mr. Skilling's testimony, I
think most of you probably know that he lacked the ability to
remember a lot of things and in some cases suggested that he
had no relation to the involvement of the partnership.
Let me ask you, Mr. Sefton, do you believe that Mr.
Skilling was accurate in his testimony in front of Congress?
Mr. Sefton. During my time in Enron Global Finance, I don't
believe I had any conversations with Mr. Skilling at all. So I
have no basis on which to judge.
Mr. Burr. But you did leave some handwritten notes about
your understanding of the makeup of the partnerships and the
need for Mr. Skilling's signature to accompany the approval,
didn't you?
Mr. Sefton. I'm not sure that my notes talk about his----
Mr. Burr. Who replaced you?
Mr. Sefton. Jordan Mintz.
Mr. Burr. And didn't Mr. Mintz testify to us that it was,
in fact, the notes that you left when you served in his role
that sort of guided him as to what everybody's involvement was
and who had to sign off?
Mr. Sefton. I didn't hear Mr. Mintz testify to that.
Mr. Burr. Was that the intention of any of the notes that
you wrote, if they referred to the need for Mr. Skilling's
signature, is that something that you understood was needed?
Mr. Sefton. As I explained earlier, I did not understand
that it was required by the Board when they waived the conflict
of interest.
Mr. Burr. Mr. Derrick, do you believe that from what you
know, Mr. Skilling was completely candid with his testimony in
front of Congress?
Mr. Derrick. Well, Congressman, as you can appreciate, I
have no way of knowing, in fact, what Mr. Skilling did or did
not know. If your question relates to whether it was my view
that his signature was required on the documents, certainly
based on my conversations with Mr. Mintz, that would have been
my understanding.
Mr. Burr. Did Mr. Mintz dream this up? Was it printed
somewhere or did he get it from the notes that Mr. Sefton left?
Mr. Derrick. I don't know where Mr. Mintz received his
information. I do recall though that at one of the Audit
Committee meetings that it was presented as a control mechanism
by Mr. Causey, as I recall, and Mr. Mintz was there. But as to
the basis for where that came from, I don't have personal
knowledge of that.
Mr. Burr. There was one thing that I know was printed at
Enron and that was the Code of Conduct, correct?
Mr. Derrick. Correct, yes sir.
Mr. Burr. The Code of Conduct was waived by the board in at
least two instances for Andy Fastow, am I correct?
Mr. Derrick. You are correct.
Mr. Burr. Were you ever consulted as counsel on whether
that was a smart thing for Enron to do?
Mr. Derrick. Congressman, I don't ever recall being
consulted.
Mr. Burr. Did you ever supply a recommendation on whether
as counsel the board should waive the Code of Conduct?
Mr. Derrick. I don't recall being consulted on that.
Mr. Burr. Mr. Dilg, was your law firm consulted on the
board's decision whether they should waive the Code of Conduct?
Mr. Dilg. We did not advise the board.
Mr. Burr. It's a very reputable law firm nationally. Is it
common for companies to have a Code of Conduct that is waived
the way that Enron has waived this Code of Conduct or waive a
Code of Conduct at all?
Mr. Dilg. I could speak to what's common, Representative,
by companies that have Codes of Conduct have them there for a
purpose which is to make sure they know where there is a
conflict of interest and they feel that they've dealt with it
appropriately.
Mr. Burr. That's my understanding from CO's as well and
they have also expressed to me in my conversations that they
can't imagine that it would take an unbelievable circumstance
within their company for a Code of Conduct to be waived.
Let me go back to you, Mr. Sefton. I think the LJM2
approval sheet was your creation and I just want to ask you
because as I go down the sheet from that sheet it says the
persons negotiating for Enron, Ben Glisson. Excuse me, this is
for Raptor. Persons negotiating for LJM, Michael Kopper. Both
who work for Fastow, correct?
Mr. Sefton. Yes.
Mr. Burr. In the 2000 Proxy, as it relates to it, it says
these transactions occurred in the ordinary course of Enron's
business and were negotiated on an arm's length basis with
senior officers of Enron other than Mr. Fastow.
Is the term ``at arm's length'' in this proxy statement an
accurate depiction of the negotiations that took place between
Mr. Glisson and Mr. Kopper, in your opinion?
Mr. Sefton. I believe the reference to senior officer is to
Mr. Causey and Mr. Buy.
Mr. Burr. I'm reading off the sheet. Listen, persons
negotiating for LJM, Michael Kopper. As counsel, how did you
monitor the negotiations or did you?
Mr. Sefton. I don't believe I monitored the negotiations.
Mr. Burr. Mr. Sefton, on June 28, 2000 you signed this
approval sheet. So I would take for granted it was your
understanding that at that time what was on this sheet was
accurate, that the negotiations took place between Glisan. He
also signed the sheet. In addition, Mr. Rogers, is your name
Rex?
Mr. Rogers. Yes sir.
Mr. Burr. You signed this sheet too.
Mr. Rogers. Yes sir, my signing those deal approval sheets
were for the limited purpose of Section 4(a) which was----
Mr. Burr. Just share with us, if you will, since there's
some confusion. Who negotiated for Enron and who negotiated for
the partnership?
Mr. Rogers. On this particular transaction or any
transaction?
Mr. Burr. This one.
Mr. Rogers. I don't know the answer to that.
Mr. Burr. Mr. Derrick, on October 17, Enron was informed by
the SEC of an inquiry, correct?
Mr. Derrick. That is correct.
Mr. Burr. And what date was the first memo that went
company-wide to Enron relative to a change in the document
protection of rules at Enron?
Mr. Derrick. If memory serves me correctly, Congressman, I
believe it was on October 25 with respect to the litigation
that had been filed.
Mr. Burr. Share with me with all the concerns that didn't
start with October 17, what transpired in an 8-day period at
Enron and specifically in the legal counsel's office that would
delay for 8 days a memorandum to protect all documents given
that you knew that there was an SEC inquiry?
Mr. Derrick. As you know, Congressman, we sent out a number
of e-mails with respect to document presentation, preservation.
I think with respect to the limited time that you're referring
to, following the communication from the Securities and
Exchange Commission, Mr. Rogers became involved in that as our
representative, having been a former member of the SEC's
organization.
If your point is were we concerned about any document
destruction at that time----
Mr. Burr. Was this the first SEC inquiry that had been
presented to Enron?
Mr. Derrick. I'll have to refer to Mr. Rogers. I don't
personally recall another SEC inquiry.
Mr. Burr. Mr. Rogers, is an SEC inquiry, given that you've
got some SEC experience, is that a serious thing?
Mr. Rogers. Very serious.
Mr. Burr. Would you as with your knowledge of SEC and law
background, is that something that would immediately send off a
signal we need to protect everything that's here?
Mr. Rogers. Yes sir.
Mr. Burr. And what would take 8 days in your opinion to
determine it's time to send out a company-wide memo to say
don't throw anything away, this is serious.
Mr. Rogers. I don't know the answer to that. I think in
those first several days after the notice or the inquiry from
the SEC, there was a lot of activity at Enron through responses
to media requests.
Mr. Burr. But you served in a legal capacity, correct?
Mr. Rogers. That's correct.
Mr. Burr. And in a legal capacity with an SEC background,
you couldn't have been distracted by media requests, given the
seriousness that you knew this inquiry weighted?
Mr. Rogers. No sir, our immediate reaction was to respond
to the SEC request for documentation, for information. That was
the immediate response.
Mr. Burr. Is part of an SEC inquiry and the request that
goes along with it the protection of documents?
Mr. Rogers. I don't recall that being part of the request,
but certainly anyone at the company, certainly anyone in the
legal staff is going to----
Mr. Burr. Knows that document destruction after that
inquiry is noticed to be a serious, serious thing, right?
Mr. Rogers. Yes sir.
Mr. Burr. And let me ask you, were you aware of any
document destruction that took place at Enron?
Mr. Rogers. I am not aware of any document destruction at
Enron Corp.
Mr. Burr. Mr. Derrick, are you aware of any document
destruction that took place at Enron?
Mr. Derrick. I'm not aware of any relevant document--if you
mean literally any document destruction, there are various
things, trade secret issues that, of course, would legitimately
be being disposed of, but in terms of any relevant document
destruction, Congressman, I am not, and as you recall, later
when there was a report which was widely publicized with
respect to potential concerns about that, the response of Enron
was to request the FBI to come in. We opened our doors and
cooperated fully with them.
Mr. Burr. Clearly, you did, and I think there was a lag and
I'm truly concerned on the 8 days. And my time has run out, but
I would like to ask Mr. Dilg, short answer if you will, for the
chairman's indulgence.
Were there legal opinions and/or work provided by Vinson &
Elkins that were ignored by Enron?
Mr. Dilg. Again, as I stated earlier----
Mr. Burr. You have advised them on numerous legal opinions.
You've stated that.
Mr. Dilg. We've advised on numerous legal matters. As I
mentioned earlier, there's never a situation that I'm aware of
where we advised the company that something would be illegal
that they ignored that advice. We give advice on a daily basis
to our clients as far as things that we think may be a better
way to do something or often offer even business advice that
companies may decide not to follow. That is sort of a normal
occurrence, but when it comes to whether something is illegal,
I'm not aware of Enron ever not following our advice in that
connection.
Mr. Burr. I once again would like to thank all of you for
your testimony today. I hope in the end, we're able to go back
and read the transcripts and understand a little bit better
what happened, but I've got to share with you that is
frustrating from this end to actually hold documents that were
at Enron that named partners, that named negotiators, that
named participants. Nobody can remember whether they were
involved or not, that from the top of Enron to the legal
counsel at Enron that it seems like the only person that knew
what was going on was Sherron Watkins. And I question whether
she was taken seriously by anybody, including the review. It's
quite honest that Enron probably got what they paid for,
$60,000 you said, was--I thought that was a drop in the bucket
for the degree of the accusations that were made. But I think
that gives me some idea of exactly the extent of what you were
asked to review. I thank you.
Mr. Greenwood. The gentleman's time has expired. The
committee is joined by two members who are members of the full
committee, but not the Subcommittee and I'm going to recognize
them in one moment for inquiry. Before I do, I'm going to
exercise the prerogative of the chair to follow up on something
here.
I'm looking at an LJM2 approval sheet. It's Tab 20 in your
notebooks. You may all want to refer to this. And it's about
halfway through the set of documents in your notebooks in Tab
20. And this describes a deal between Talon, which is a Special
Purpose Entity organized for the purpose of entering into
certain derivative transactions. LJM2 says--it says that LJM2
through its 100 percent voting control, Talon has unilateral
ability to make investment decisions for Talon. Now--it's the
Raptor deal.
It indicates in the person negotiating for Enron in this
case is Ben Glisan. The person negotiating for LJM is Michael
Kopper. Obviously, both of these gentleman work for Mr. Fastow
and each working for him under one of his different hats that
he wore.
A number of you folks signed the approval deal. These
transactions were negotiated by Enron employees who were
working for both Enron and LJM2 at the same time. Enron's Year
2000 proxy statement reads, ``These transactions occurred in
the ordinary course of Enron's business and were negotiated on
an arm's length basis, that senior officers of Enron other than
Mr. Fastow'' and that was signed by, among others, Mr. Rogers
and Mr. Sefton.
My question is Mr. Sefton and Mr. Rogers, beginning with
you, how did you ascertain that, in fact, these were arm's
length--these negotiations were at an arm's length basis?
Mr. Rogers. I'll respond first. Again, my signing off on
all of these deal approval sheets was for the limited purpose
of Section 4(a). Will this transaction require disclosure as a
certain transaction in Enron's proxy statement? And the answer
is yes. If any of the transactions has a value of $60,000 or
more it will be disclosed in the proxy statement.
Mr. Greenwood. Were you aware that these two gentlemen were
negotiating against one another?
You signed a document that said that you knew that they
were, but that you knew that it was arm's length.
Mr. Rogers. Again, I was signing for the limited purpose of
Section 4(a).
Mr. Greenwood. Did you know that they were negotiating
against one another? That's--let's take it one question at a
time. Did you know that these two gentlemen were negotiating
against one another?
Mr. Rogers. I don't recall.
Mr. Greenwood. But you signed a form that said that you did
and that, in fact, not only did you know that they did, but you
knew that it was arm's length.
Mr. Rogers. Well, signed for the purposes of Section 4(a).
Mr. Greenwood. Mr. Sefton, how about you? Did you know that
these individuals were negotiating against one another?
Mr. Sefton. Yes.
Mr. Greenwood. And did you sign a form saying that you knew
that they were negotiating at this negotiation was at arm's
length?
Mr. Sefton. I signed the form.
Mr. Greenwood. Did you in signing that form, in fact,
certify that they were negotiating at arm's length?
Mr. Sefton. No, I did not.
Mr. Greenwood. What is the significance of your signature
on the form? What were you certifying? What were you proving?
Mr. Sefton. I think the important thing to remember is that
this transaction is being approved by Mr. Buy and Mr. Causey,
and that is the procedure that the board had put in place to
ensure that the transactions were being done at an arm's length
basis.
Mr. Greenwood. And how did you know that it was approved by
Causey?
Mr. Sefton. Because they are signing the form as well.
Mr. Greenwood. So in other words, your role when you get
this form is to look on it and see if Mr. Causey's signature is
on it and then certify that his signature is on it and put your
signature on it to certify that his signature is on it. Is that
right?
Mr. Sefton. What? The board required----
Mr. Greenwood. Is that--just answer that question. When you
signed these approval forms, what you were doing was saying,
yup, I see Causey's signature on here. It's right above mine.
I'll sign mine name to certify that I see Mr. Causey's
signature. Is that what you did?
Mr. Sefton. No.
Mr. Greenwood. What did you do?
Mr. Sefton. I would also review the form and make sure it
had been completed, all the blanks filled in. That it was
properly filled out. Since I had been involved in creating the
form, I was----
Mr. Greenwood. Whose job was it to--who certifies that, in
fact, these transactions occurred in the ordinary course of
Enron's business and were negotiated on an arm's length basis
with senior officers of Enron's, other than Mr. Fastow? Whose
job was that?
Mr. Derrick, can you tell us whose job it was to certify
this was arm's length? This goes right to the core of the
conflict of interest?
Mr. Derrick. Well, I believe that it was Mr. Causey and Mr.
Buy who were charged with the responsibility on the business
side of that, in determining that. If there had been matters
that were unlawful, I think that the lawyers would have been
signing this. And let me say I did not create this form, but
that would be my understanding, Mr. Chairman, is that the
lawyers were there to ensure----
Mr. Greenwood. You were aware that they were negotiating
against one another?
Mr. Derrick. No, this is not a form that came to me, Mr.
Chairman.
Mr. Greenwood. Would you have considered it improper if you
knew that they were negotiating against one another?
Mr. Derrick. At the time of this, again, I'm not sure what
the date here was, but I don't think that we became aware that
Mr. Glisan had any interest that was not tantamount to Enron's
interest until after the investigation began.
Mr. Greenwood. The private placement memorandums list the
principals. It says the day to day activities of the
partnership will be managed by Mssrs. Fastow, Kopper and
Glisan. So Mr. Sefton saw this form. Mr. Astin saw this form.
Mr. Rogers saw this form. You all reviewed it and that didn't
tell you that there was something less than an arm's length
negotiation going on here?
Mr. Rogers. I'm sorry, what form are you referring to?
Mr. Greenwood. It's the LJM2 co-investment LP. It's the
private placement memorandum.
Mr. Rogers. That's not an Enron document.
Mr. Greenwood. That's 21.
Mr. Rogers. Okay. It's a private placement memorandum.
Mr. Greenwood. Right.
Mr. Rogers. Of LJM. I reviewed a draft of it. I didn't see
the final version of it.
Mr. Greenwood. Do you think the draft of it indicated that
the partners were--that the day to day activities of the
partnership will be managed by Fastow, Kopper and Glisan?
Mr. Rogers. It was my understanding that Glisan was not in
the final draft. I didn't see the final, but it was my
understanding that wasn't going to be Glisan's role.
Mr. Greenwood. You can remember that?
Mr. Rogers. I do remember that.
Mr. Greenwood. You remember that--why do you think that
sticks out in your mind? Why would you have recalled that?
Mr. Rogers. I recall that because----
Mr. Greenwood. Had it been otherwise, you would have been
concerned?
Mr. Rogers. I recall it because we had a senior corporate
securities lawyer at Vinson & Elkins review the memorandum.
Again, it's not a memorandum.
Mr. Greenwood. Who was that?
Mr. Rogers. It was Bob Baird. It wasn't a memorandum. It's
not an Enron Corp. memorandum. It was prepared by LJM and their
counsel. And the draft that I saw had, among other things, Ben
Glisan, my understanding, I didn't see the final draft, but it
wasn't my understanding that Ben Glisan was going to be acting
on behalf of LJM.
Mr. Greenwood. Would you have thought it proper for these
guys to be negotiating against one another, one on behalf of
the partnership and one on behalf of the company? Could that
ever have been proper?
Mr. Rogers. My understanding at the time is that Mr. Glisan
was the treasurer of Enron Corp. and that he would have been
acting on behalf of Enron Corp.
I didn't have any information at the time that indicated
otherwise.
Mr. Greenwood. The chair recognizes the gentleman from
Massachusetts, Mr. Markey for 10 minutes.
Mr. Markey. Thank you, Mr. Chairman, very much. Mr.
Derrick, I want to recap where we are right now in this
hearing. You've testified that when Sherron Watkins' allegation
came to your attention Enron and Vinson & Elkins designed (1)
to ignore her warnings, that Vinson & Elkins and Arthur
Anderson had conflicts and shouldn't be used to investigate the
allegations; (2) you also decided to limit the nature and scope
of Vinson & Elkins inquiry so that it didn't examine the
underlying accounting, didn't employ full discovery and
investigative techniques; (3) you also decided notwithstanding
this blistering, scalding indictment of a memo which Ms.
Watkins delivered to Mr. Lay and to you, subsequently, you also
decided, No. 3, not to interview any former employees, like
Jeff Skilling or Cliff Baxter who might have been able to shed
some light on the transaction; (4) not to follow-up on leads
Sherron Watkins provided with respect to other employees who
could substantiate her allegations, notwithstanding the fact
that she has almost been completely vindicated in retrospect;
and (5) to largely limit your inquiry to interviewing
individuals like Andy Fastow and Doug Duncan who were
responsible for putting together these transactions or
reviewing and approving them and who would therefore be likely
to defend these transactions as appropriate and lawful.
So Mr. Derrick, what I'd like to do is just go back to the
beginning of the process which you put in place. According to
your testimony to the Powers Committee, you first learned of
the Sherron Watkins letter when Ken Lay gave it to you. What
did Mr. Lay say to you when he gave you this letter?
Mr. Derrick. I don't recall the specific conversation, and
I don't recall whether, as I think I made it clear there,
whether he walked it over, whether he sent it over, but
immediately upon receiving it I distributed the copies of that
memorandum to what I thought at the time were the appropriate
people, which included Sharon Butcher, who keeps care of our
tracking log, to Mr. Fastow, Mr.----
Mr. Markey. So you are saying you cannot remember if Mr.
Lay handed this to you personally? You cannot remember that.
Mr. Derrick. Congressman, all I can testify to is what I
personally recall.
Mr. Markey. This is a bombshell. He handed you dynamite
that could blow up the Corporation or he did not. You don't
remember if he did.
Mr. Derrick. I don't recall whether it was carried over or
whether he brought it over. No, I'm sorry, I just don't.
Mr. Markey. That is hard to believe. Now, let me ask you
this: Did you and Mr. Lay discuss whether the issues raised in
the letter might arise at an all-employee meeting scheduled to
be held in a few days?
Mr. Derrick. There was an all-employee meeting, and the
question was----
Mr. Markey. You discussed that subject with Mr. Lay.
Mr. Derrick. I think we did, yes. I can't say that it was
the time that I received the letter.
Mr. Markey. You told the Power Committee that in fact you
did discuss subject with----
Mr. Derrick. Yes, but the question, Congressman, is whether
it was at the time I received the letter. I don't recall
whether it was at the time I received the letter.
Mr. Markey. Subsequent to the receipt of the letter, within
the next several days, did you discuss it with him?
Mr. Derrick. Yes.
Mr. Markey. You did. Now, you and Mr. Lay discussed the
need to have an investigation done into these allegations. Who
proposed selection of Vinson & Elkins, you or Mr. Lay?
Mr. Derrick. I believe--well, it was a mutual discussion,
but I think it would have been me who proposed Vinson & Elkins.
Mr. Markey. Okay. Did you discuss with Mr. Lay the
potential conflict of interest which Vinson & Elkins had with
Enron?
Mr. Derrick. Yes, we did. We discussed the possible
downside because they had been involved in it. On the other
hand, there was, as I've said before, the great strength that
they had the background, and following up on that--but the
question ultimately would be for the law firm to determine
whether in fact there was a conflict of interest.
Mr. Markey. Did Mr. Lay suggest that Vison & Elkins'
investigation be limited in scope and that it not examine the
accounting and that it not be a full-scale inquiry with
discovery and interviews with both current and former
employees? Did he ever suggest that to you?
Mr. Derrick. We discussed it. I don't recall that Mr. Lay
proposed that. The question was how do we, as quickly as
practical, get an investigation that will enable us to have
recommendations as to whether to launch a full-scale
investigation.
Mr. Markey. So did Mr. Lay say to you that it would
preferable if we did not have to go outside of Vinson & Elkins
or Arthur Andersen?
Mr. Derrick. To the best of my knowledge, he never
expressed that.
Mr. Markey. He did not.
Mr. Derrick. He did not.
Mr. Markey. Okay. Did you and Mr. Lay discuss potential
adverse publicity that would result if Ms. Watkins' allegations
became public?
Mr. Derrick. To the best of my recollection, there was
never a discussion with respect to that.
Mr. Markey. Did you and Mr. Lay discuss the potential
litigation that could result if these allegations became
public?
Mr. Derrick. To the best of my knowledge, we never had a
discussion. Our sole purpose was to address these as quickly
as----
Mr. Markey. You are saying absolutely not. Mr. Lay never
raised the public relations aspect of this, the consequences to
the corporation if this ever became public. He never said that
to you during any of these meeting?
Mr. Derrick. I believe that you are referring to the
initial meetings we had.
Mr. Markey. I am referring now to all of the meetings up to
the point at which ultimately we have a release of this report
by Vinson & Elkins. Did he ever mention at any time his great
concerns about--remember now, you are a former partner of
Vinson & Elkins now dealing with the managing partner of Vinson
& Elkins, so we are very concerned about this conflict that
exists, at least in your mind, to preexisting loyalty to a firm
that basically gave you the opportunity to work at Enron. So
what about any conversation--did Mr. Lay at any time ever have
any conversations with you about the publicity consequences if
this report was devastating?
Mr. Derrick. Congressman, the only recollection I have
would be at the time that Vinson & Elkins presented their
presentation to us, pointing out the possibility of adverse
publicity and litigation, but I don't recall Mr. Lay ever
raising that as an issue.
Mr. Markey. Did you ever discuss with Mr. Lay whether Ms.
Watkins could or should be dismissed?
Mr. Derrick. No, I do not recall ever having a conversation
with Mr. Lay. He mentioned that she had requested that she be
reassigned from Mr. Fastow, but there was never any indication
in any conversation I had with Mr. Lay with respect to any
firing of Ms. Watkins.
Mr. Markey. Okay. Now, Mr. Dilg, did Mr. Derrick at any
time say to you that he would prefer that you resolve this
question in a way in which you did not have to recommend
another firm do the investigation?
Mr. Dilg. No, sir.
Mr. Markey. He never did.
Mr. Dilg. No, sir.
Mr. Markey. Did you ever recommend to him that you would
prefer that it stay in-house and that another firm not be
called in to do an independent investigation?
Mr. Dilg. No, sir. Our final recommendation in the October
15 letter was that there was no further investigation.
Mr. Markey. When Mr. Lay--did you ever talk to Mr. Lay
about this case, Mr. Dilg?
Mr. Dilg. We had one meeting with Mr. Derrick and Mr. Lay I
believe--I think the date was September 21, but I am not
positive.
Mr. Markey. And at that meeting, did Mr. Lay say to you
that he would prefer if you did the investigation, that is
Vinson & Elkins, and not some outside firm?
Mr. Dilg. No, sir. We were reporting on the investigation
we had done thus far.
Mr. Markey. And at that point, you had not reached any
conclusions that would indicate that the accounting practices
or other practices would cause problems for the firm?
Mr. Dilg. We reported on what we had heard from Arthur
Andersen with respect to the accounting.
Mr. Markey. And you were satisfied that there were no
problems?
Mr. Dilg. I am not an accountant, so we alerted him to the
references to creative and aggressive, et cetera, that we had
heard during our interviews, but we did tell him that Arthur
Andersen was fully comfortable with their accounting treatment.
Mr. Markey. You know, I have a real problem with all of
this. Obviously, the Powers Committee conducted a real
investigation. Enron and Vinson & Elkins did not in fact
conduct a real investigation. When the ordinary investor or
employee at Enron thinks that an investigation is being done,
they think that people, that is the investigators, are acting
like Columbo, asking all the questions that no one else would
think of in order to make sure that the truth was obtained. In
fact, what you did was act more like Inspector Clueso,
stumbling over obvious evidence, not interviewing obvious
suspects or witnesses, and in fact coming to conclusions that
delayed the point at which a real reckoning was in fact
possible.
And I think if you had not conducted this phony
investigation, that it might have been possible that we would
not have seen the collapse of Enron, that we would have had
enough time to take the types of actions, not we, but rather
the corporation and others, in order to save that corporation,
the employees' jobs, the investors' savings. And so I have
absolutely no question in my mind that there was a decision
made here. I wish I knew definitively who made the decision
that this was going to be too dangerous. We don't know that at
this point.
I disagree with Ms. Watkins. She rules out Mr. Lay. I don't
think that this committee should rule him out. I don't think
yet we know what took place in those conversations initially
after he received this memo from her. It is such a blistering,
scalding indictment of the practices at the firm that
ultimately have been almost completely vindicated, that much
more is going to have to be found by this committee. I thank
you once again, Mr. Chairman.
Chairman Tauzin. I thank my friend from Massachusetts, and
I am pleased now to recognize a round of questions my friend
from Texas, Mr. Green.
Mr. Green. Thank you, Mr. Chairman, and I appreciate the
opportunity to wave in on the subcommittee, and I have an
opening statement that we have submitted. And I guess before I
go into questions, the frustrations that someone--particularly
someone from Houston for 30 years had the utmost respect for
Arthur Andersen and Vinson & Elkins and the last 16 for Enron,
even if we are on a different sides of a political issues
oftentimes, and to see what has happened. And that is the
frustration that we see, and you see if from other members who
maybe aren't directly related to what has happened in Houston.
Mr. Rogers, first, who did Mr. Glisan report to at Enron?
Mr. Rogers. He reported to Mr. Fastow.
Mr. Green. Okay. So he wasn't independent of Mr. Fastow?
Mr. Rogers. I am sorry?
Mr. Green. So he was not independent of Mr. Fastow if he
reported to Mr. Fastow.
Mr. Rogers. When you say independent, I mean he reported to
Mr. Fastow, that was his superior officer, that is correct.
Mr. Green. Okay. Mr. Sefton, according to your notes, and
they are under Tab 18, and it is actually 24309, on September
29, 1999, shortly after you arrived in Houston to begin working
for Mr. Fastow, you had a meeting with Mr. Fastow, is that
correct?
Mr. Sefton. These notes would indicate that I did, yes.
Mr. Green. Okay. And he explained the LJM deals to you,
didn't he?
Mr. Sefton. I don't recall that meeting. My best
recollection of what happened at that meeting is in these
notes.
Mr. Green. Okay. And your notes reflect LJM1, and without
having to read all the notes from September 29, they reflect
LJM just some of the highlights, without having to go into them
because I only 10 minutes, but your notes reflect discussion on
LJM, is that correct, these notes that we have in Tab 18?
Mr. Sefton. Yes. These notes were taken, I believe, during
a discussion. I don't know what each individual means, whether
it reflects a statement made by Mr. Fastow or whether it is
sort of an observation on my own part.
Mr. Green. Well, assuming they were your notes and they
were observations of your meeting, one of the purposes of LJM1
that your notes directly mention was to hedge Enron's
investment in RythmsNet stock, which was very volatile. Enron's
investment had gone from $10 million to $150 million in less
than 6 months after RythmsNet went public; is that correct?
Mr. Sefton. I don't know that.
Mr. Green. Okay.
Mr. Sefton. I wasn't involved in the LJM1 transaction, that
took place before I arrived.
Mr. Green. Okay. Well, but your notes that we are going
from talk about your discussion with him, and maybe I need to
read the notes to you, because they are there. ``Two things led
to LJM1: forward contents to purchase Enron stock, prices below
market. Buying shares back would have increased equity, but we
would have had to borrow money which would cause problems. Had
the Rhythm stock position, huge volatility. We want to hedge
the Rhythm stock position but couldn't do it in market.'' Those
are your notes.
Mr. Sefton. Yes.
Mr. Green. Okay. I would appreciate it if you would at
least familiarize yourself with your notes. Then when I ask you
the question, instead of me having to take up my 10 minutes in
reading your notes to you.
Mr. Sefton. I am sorry. That wasn't----
Mr. Green. Enron could not sell its Rhythm stock for
another 6 months; is that correct?
Mr. Sefton. Is that in my notes?
Mr. Green. No, it is not, but I am asking you from other
knowledge other than these notes. Your notes reflect the
volatility of the Rhythms stock position and the huge
volatility. Do you know that Enron couldn't sell their
investment in it for 6 months?
Mr. Sefton. I am sorry, but I did not work on that
transaction. I am not familiar with what happened there.
Mr. Green. Okay. That is what Vince Kaminski told the
Powers Committee, though, that Vince Kaminski was the head or
Enron's research group at the time, told the Power Committee
that could not buy such a hedge in the market because it
prohibitively expensive, obviously very volatile from your
notes. In fact, yesterday the analyst from
PricewaterhouseCoopers who valued that stock for Enron told our
staff that the volatility was off the charts. So, again,
reflects your notes from 1999.
According to your notes, Mr. Fastow told you that Enron
couldn't hedge Rhythms in the market. Was it also your
understanding that no outside third party would have taken the
hedge at the price LJM did?
Mr. Sefton. All that I recall from this meeting are these
notes.
Mr. Green. Okay. Your notes, again, seem to refer to the
Rhythms stock position had huge volatility, and your notes
reflect, ``We wanted to hedge the Rhythms stock position but
couldn't do it in the market.'' So that agrees with what Mr.
Kaminski shared with us yesterday, and also the analyst from
PricewaterhouseCoopers.
It is very interesting in the 1999 annual report, footnote
16, that states that, ``Management believes that the terms of
the transactions related with the representative terms that
would be negotiated with an unrelated third party.'' Did you
see any evidence from your notes or from your memory other than
your notes that that was an independent third party?
Mr. Sefton. I am sorry, you are referring to what document?
Mr. Green. Okay. The annual report for Enron was 1999.
Mr. Sefton. The annual report?
Mr. Green. Footnote 16. Just trust me I am----
Mr. Sefton. Okay.
Mr. Green. [continuing] saying that footnote 16 states
that, ``Management believes that the terms of the transactions
with related parties are representative of terms which would be
negotiated with unrelated third parties.'' That is in that
report. Do you have any evidence of that from your notes or
your memory that that was really unrelated third parties in
LJM1?
Mr. Sefton. Well, I am not sure if I am answering your
question, but I wasn't involved in the preparation of that
annual report footnote. I am not familiar with----
Mr. Green. I know, but I am asking you do you have any
information that would show that that footnote was correct from
your notes here and any information at all, other than your
recollection from these notes?
Mr. Sefton. No, I don't think there is anything in my notes
that would speak to that.
Mr. Green. Okay. The proxy says that same thing, the proxy
statement. It states that, ``Management believes that the terms
of the transactions were reasonable and no less favorable than
the terms of similar arrangements with unrelated third
parties.'' Mr. Sefton, Mr. Derrick and Mr. Astin, tell me what
basis you had on signing off on the statement, and what was the
due diligence that these representations called for?
Mr. Derrick. Congressman, speaking for myself, I didn't
have a personal involvement in that. We had in place what we
considered to be a large team of qualified people who would
have been looking at that and preparing the proxy statements.
And it would have been on the basis of what they did that would
have been the basis for that statement.
Mr. Green. Who was in charge of making sure this proxy
statement was correct then within the Enron legal team?
Mr. Derrick. Well, internally, Mr. Rogers was leading our
securities effort.
Mr. Green. Okay. Mr. Rogers, the statement that,
``Management believes that the terms of the transactions were
reasonable and no less favorable than the terms of similar
arrangements with unrelated third parties,'' did you sign off
on that statement to be in the proxy?
Mr. Rogers. I was part of the team that was charged to
gather the information. I did not do the personal due diligence
on that.
Mr. Green. What was the due diligence from the team, if not
yourself?
Mr. Rogers. The due diligence were lawyers and accountants
within Enron were assigned to gather the information. I didn't
draft the proxy disclosure.
Mr. Green. But you signed off on it.
Mr. Rogers. Well, when you say signed off on it, I reviewed
it, and based on the information that was presented to us, we
agreed with it.
Mr. Green. What information was presented to you from the
lawyers and accountants to show that this was no less favorable
than unrelated third parties?
Mr. Rogers. The internal legal team that worked on the
underlying transactions. My team did not work--was not assigned
to work on any of the LJM or any of the structured finance
transactions. So we had no personal knowledge of them. The
parties that were assigned to draft the proxy disclosure were
the parties that worked on the transactions and the lawyers and
accountants that worked on the transactions that would have
done the due diligence.
Mr. Green. Can you give us some names of who that would be,
the lawyers that worked for your team--or that worked for that?
Mr. Rogers. I don't know the specific lawyers and
accountants. It would have been lawyers in the Enron Global
Finance Unit and the accounting team that reports to Rick
Causey who also signs off on all of the LJM transactions, along
with the chief risk officer who was reviewing these
transactions in terms of fairness to Enron.
Mr. Green. So someone told you in those teams that this
statement was correct, and you signed off on it.
Mr. Rogers. Based on that compilation of due diligence,
correct.
Mr. Green. Mr. Rogers--and Mr. Chairman, I know--let me
just ask, on the statements on the LJM approval sheet where you
signed--in previous questions, you answered that you only
signed off relating to 4(a).
Mr. Rogers. That is correct.
Mr. Green. Is that 4(a) on the compliance sheet of this or
is that some other----
Mr. Rogers. No, it is 4(a) on this sheet. It is 4(a), does
it require proxy disclosure, and the answer is yes, because
Andrew Fastow, as the chief financial officer of Enron, is a
related party. There is a clear conflict; it is required to be
disclosed.
Mr. Green. It was required to be disclosed. I guess just as
a lawyer, whenever I always sign for something that was
specific only for, for example, 4(a) or whatever, I always
wanted to make sure that was under my signature, and I think
most documents I used to sign with Vinson & Elkins, if there
was limited responsibility, I always spelled that out.
Mr. Rogers. I wish I had done that.
Mr. Green. I understand. Thank you, Mr. Chairman.
Chairman Tauzin. The Chair thanks the gentleman; his time
has expired. The Chair recognizes the gentleman from
California, Mr. Waxman, for a round of questions.
Mr. Waxman. Thank you very much, Mr. Chairman. Since the
very first hearing on the Enron scandal before this committee,
I have sought information about Enron's Special Purpose
Entities. What we know about these entities is very disturbing.
While Enron employees made millions with no apparent risk,
Enron shareholders and employees lost their shirts. And due to
Enron's remarkable political clout, not a single regulator was
in a position to prevent this debacle.
We are now 3 or 4 months into this investigation, yet we
appear no closer to having a complete list of the partners and
investors in Enron's many partnerships. Amazingly, in previous
hearings, neither Enron's executives nor its accountants could
tell us who the partners and investors were. Well, testifying
before us today are the lawyers who actually worked on many of
these partnerships. Surely it will help that you witnesses will
be able to shed some light on these important questions.
Let me start with you, Ms. St. Clair. You worked on the
legal aspects of the Jedi/Chewco transaction. How can we find
out who the partners and investors were in Enron's many
partnerships? Can you tell us who has this list and what the
documents the committee should request to obtain this list?
Ms. St. Clair. With respect to Jedi/Chewco? I mean that is
the only transaction that I am familiar with.
Mr. Waxman. Well, how about any of the partnerships?
Ms. St. Clair. I am not familiar with, other than looking
at the partnership agreement itself and who signed it and
whether it has a list of partners.
Mr. Waxman. Who signed it--I am sorry, I didn't hear what
you said. You looked at the partnership agreement and who
signed it.
Ms. St. Clair. What partner signed it and whether or not it
has a list of partners. Some partnership agreements do.
Mr. Waxman. Okay. And where would we be able to get a copy
of those lists that were in those agreements, of partners?
Ms. St. Clair. With respect to--I can only address with
respect to the Chewco partnership.
Mr. Waxman. Well, let us go to Jedi/Chewco.
Ms. St. Clair. Jedi/Chewco?
Mr. Waxman. Yes. Did that have a list of partners?
Ms. St. Clair. I think the Chewco partnership agreement is
in the files and has been available, yes.
Mr. Waxman. Okay. And do you know whether that has been
requested by this committee?
Ms. St. Clair. I don't know.
Mr. Waxman. Well, I am going to make a request to the
chairman that he--Mr. Chairman, I would request since Ms. St.
Clair believes the names of the partners are on the Jedi/
Chewco--are in their files, that we request that information
for the committee.
Chairman Tauzin. My understanding, Mr. Waxman, is that
request is already before Enron and its counsel, and I don't
think we have yet received all of our responses. We have not
received all the records, and if there is a need yet under that
inquiry, that request for documents, to satisfy that, it has
not been met, either by Vinson & Elkins or by the firm, I would
renew it here today, and we will renew in writing if we need
to.
Mr. Stearns. Point of information, Mr. Chairman.
Chairman Tauzin. The gentleman is recognized for a point of
information.
Mr. Waxman. Mr. Chairman, this won't go against my time,
will it?
Chairman Tauzin. It will not go against your time. Depends
how long his information is.
Mr. Stearns. I think the gentleman's request is a very
pertinent one, not only Chewco but for the other ones. As I
understand from our staff, we have requested these documents to
find out who the investors were for all these partnerships. And
I think the question is, Mr. Chairman, how long ago did we
request this information to find out who the partners were of
these Special Purpose Entities? Just how long ago has it been,
just approximately?
Chairman Tauzin. My understanding it has been since
December.
Mr. Stearns. Okay.
Chairman Tauzin. And we are still literally receiving
documents from Enron as we speak. As you know, we are still
trying to understand whether the documents we requested are
available, or were they part of any potential shredding that
went on at Enron, and that is still an open question.
Mr. Stearns. And the last question I have for Mr. Chairman,
would these gentlemen--was it asked of the law firm these
documents or Enron? And if we are having a difficult time from
Enron, can we ask the gentlemen here for the same set of
documents, because surely they kept a copy?
Chairman Tauzin. My understanding is the inquiries were
directed to Enron itself, and obviously if we don't come into
possession of that information from Enron, we will make a
request upon Vinson & Elkins for that information. In fact, as
I said, I am lodging that request publicly today that
information be provided to us voluntarily, because we
apparently are having some trouble getting it from Enron
itself.
Mr. Stearns. Thank you, Mr. Chairman.
Chairman Tauzin. Thank the gentleman.
Mr. Waxman. Thank you, Mr. Chairman.
Chairman Tauzin. Again, the gentleman has 8 minutes and 17
seconds to go.
Mr. Waxman. Well, I appreciate my colleague's very helpful
line of inquiry, because we are trying to get this information,
and we have gone all these months without getting it. And I
would hope the law firms that have it would submit it to us.
Mr. Sefton, you were general counsel of Enron's Global
Finance Unit. You worked on certain aspects of the LJM
partnerships. Can you tell us where we can obtain a list of the
partners and investors in the LJM partnerships or other
partnerships? Let us say the LJM partnerships first.
Mr. Sefton. It is my understanding that the partners in LJM
are not known to Enron, because LJM was an outside entity, and
I don't believe that information has been made available to the
company.
Mr. Waxman. Who would have that information?
Mr. Sefton. I believe Mr. Fastow would or I guess maybe now
Mr. Kopper.
Mr. Waxman. And, Mr. Chairman, if I might ask whether that
information has been requested from Mr. Kopper?
Mr. Sefton. I believe that would be the correct person to
ask.
Mr. Greenwood. I am sorry, would the gentleman from
California reiterate which specific material?
Mr. Waxman. Well, I have asked Mr. Sefton about the LJM
partnership, and he thinks that the investors and names of the
LJM partners are with Mr. Kopper. So I don't know if this has
been requested, but I think we ought--since he has identified
where we can get that information, I would hope--rather than
take up my time now, I will ask the Chair to get that
information subpoenaed.
Mr. Greenwood. For the gentleman's information, we have
requested those documents. We have some documents, and we will
work with you to make sure that you have the opportunity to
review them.
Mr. Waxman. Thank you very much. Mr. Sefton, so you think
it is there. Who is Mr. Kopper?
Mr. Sefton. Mr. Kopper is a gentleman who purchased Mr.
Fastow's interest in LJM2, I understand.
Mr. Waxman. Do you know who else might have a copy of the--
or a list of the investors in LJM?
Mr. Sefton. Mr. Fastow, possibly.
Mr. Waxman. Okay. How about the other partnerships, do you
have any information about the names of the partners and
investors in any of the other partnerships?
Mr. Sefton. I would think that the corporate secretary at
Enron would have information about all of the entities that
Enron has an ownership interest in, and I believe the records
reflect who all the other owners are, if it is not entirely
owned by Enron. But others here can possibly clarify that in
case I am wrong.
Mr. Waxman. Does anybody want to make a clarification of
that? Mr. Derrick?
Mr. Derrick. Well, I could--I think it is--it would
certainly be true that the Enron corporate secretary will have
a list of all the Enron entities and in terms of the Enron
ownership would certainly have that. Now, as to a third party,
for example, LJM, which is not an Enron entity, it is unlikely,
in my judgment, that that information would be available within
the Enron corporate secretary's office.
Mr. Waxman. And where would that information be available?
Mr. Derrick. Well, again, I assume, with respect to any of
these third party entities, it would be that entity itself. In
the same way that Enron would have knowledge of its side of the
ownership, the third party ought to have records which will
identify who their owners are.
Mr. Waxman. So would it be fair to say that Enron would
have a list of all these entities, but then we have to go to
the entities to get the names of the investors?
Mr. Derrick. I think it would be fair to say, Congressman,
that Enron would have a list of the entities in which it has an
ownership interest and could identify the Enron side of that
equation. The other side of the transaction would be, by
definition, not an Enron entity, and I think it is unlikely,
though I can't say with any certainty, but unlikely that the
Enron record would disclose who the owners of that other entity
are. And so my thought would be that a request to that other--
that third party entity would produce the information that you
are requesting.
Mr. Waxman. And do we have a complete list of all the third
party entities?
Mr. Derrick. I don't know the answer to that.
Mr. Waxman. Does Enron have a list of all the third party
entities?
Mr. Derrick. Well, Enron should have a list of all of the
entities in which it, Enron, has an interest, which I hope is
responsive to your question, I am not sure.
Mr. Waxman. And what third party entities are there that
Enron wouldn't have an interest but are connected to the Enron
issue?
Mr. Derrick. Well, for example, there could be several
tiers within the third party entity. I don't pretend to--I
wasn't involved in these transactions in any detail, but, for
example, some of the charts that have been shown disclosed that
there are multi-tiers, and that is what I am referring to.
Mr. Waxman. So if we are trying to find all the
information, we start with all the third parties where Enron
had an interest. Then we would go to each of those separate
entities and ask them about other entities that they may have
dealt with.
Mr. Derrick. Well, that would be my thought, yes.
Mr. Waxman. Okay.
Mr. Stearns. Would the gentleman yield just for a second?
Mr. Waxman. I am afraid to yield to you because I have so
little time, but I know you probably will get your own time in
a minute.
Mr. Derrick, you were Enron's general counsel. Can you tell
the committee where we would find the necessary documents to
obtain the list of partners and investors?
Mr. Derrick. Well, I don't think I have much to add to what
I just said, Congressman, on that point.
Mr. Waxman. Okay. Mr. Rogers, you are the only lawyer
testifying today who still works for Enron, and you also worked
on aspects of the LJM transactions. Can you tell us where we
can obtain a list of the partners and investors in LJM?
Mr. Rogers. Actually, Congressman, I did not work on the
LJM transactions, but I think part of the problem here is that
LJM, despite Mr. Fastow's relationship to it, is not an Enron
entity; it is a separate entity. And I think that is part of
the problem is that Enron doesn't have access to the records of
LJM and the investors in LJM. And I think part of the problem
is the people that would have that information, I don't know if
it is going to be very helpful to you, as Mr. Sefton said,
would be Andy Fastow, Michael Kopper, who I understand was the
individual to whom Mr. Fastow sold his interest, the law firm
representing LJM, which I am sure they attorney/client
privilege issues. But a lot of the information that you want on
investors into these other entities, if they are not Enron
subsidiaries or subsidiaries that Enron controls or has
ownership interest in, I think that is part of the delay in
getting this information. I am not sure Enron has that
information.
Mr. Waxman. Well, let me ask this of anybody at the table,
because you are all Vinson & Elkins lawyers. Does anybody have
anything else to tell the committee where and how we can obtain
a list of the partners and investors in all these Enron special
entities? Anything more to add? Yes?
Mr. Astin. Congressman, the only thing I would add is that
I have read news reports that indicate there is litigation I
believe in the State of Delaware regarding LJM2 that might
disclose the names of the partners.
Mr. Waxman. Let me ask each of you, if you would, to
respond. Are you personally aware of the names of any of the
investors in the Special Purpose Entities or other
partnerships? And why don't we start with you, Mr. Sefton?
Mr. Sefton. I am sorry, am I aware of----
Mr. Waxman. Are you personally aware of any of the names of
the investors or partners in this Special Purpose Entities? Can
you tell us any that you know of and some of the figures that
are in those entities?
Mr. Sefton. Well, I know that Enron has formed several
different--many subsidiaries that I think would be classified
as Special Purpose Entities, and they may have investors
ranging from institutional investors, investment banks, pension
funds.
Mr. Waxman. I am really asking now what are the categories
what your personal knowledge is of the participants in these
special entities?
Mr. Sefton. I can't identify any, sitting here right now.
Mr. Waxman. Mr. Chairman, my time is--I would like to have
this as a request for the witnesses to respond in writing of
their personal knowledge of the names of any of the special
entities and participants or investors in those special
entities. And I will be pleased to hear----
Mr. Greenwood. We will make Mr. Waxman's request an
official request from the committee. Did the witnesses
understand Mr. Waxman's request? We are asking you to supply--
--
Mr. Waxman. Your personal information----
Mr. Greenwood. Reiterate your request, please.
Ms. St. Clair. Which entities are----
Mr. Waxman. So whatever Special Purpose Entities you know
about and whatever investors or partners in those entities that
you know about, I would like you to submit to the committee in
writing that information.
Mr. Greenwood. The time of the gentleman has expired. We
will go to a second round now, and we will just take 5 minutes
for questions for each of us for the second round, and I will
begin.
Let me address some questions to you, Ms. St. Clair, and I
would refer you to Tab 25. This is the mysterious document that
surfaced in November of last year about the--that refers to the
$6 million side agreement to the Jedi/Chewco revolving loan
agreement, dated December 30, 1997. This was the reason that
Chewco and Jedi had to be consolidated onto Enron's books and
prior year financial statements revised back to 1997. If you
look at the document, you will see on page 2 that there are
initials next to the Enron signature line. Are those your
initials, Ms. St. Clair?
Ms. St. Clair. Yes, they are.
Mr. Greenwood. Okay. Did you draft this side agreement?
Ms. St. Clair. I don't recall, but there is a footer on the
second page that doesn't look like an Enron footer.
Mr. Greenwood. Say that again.
Ms. St. Clair. At the bottom of the signature page to the
left, it doesn't look like an Enron footer to----
Mr. Greenwood. So you don't think you drafted this
document. Do you know who drafted it if it was not you?
Ms. St. Clair. I don't recall.
Mr. Greenwood. Mr. Astin, have you looked at this document?
Mr. Astin. I haven't right now, but I have seen it before.
Mr. Greenwood. Okay. Do you know who drafted the document?
Mr. Astin. I am not certain, but our records indicate that
it was likely drafted by Vinson & Elkins.
Mr. Greenwood. Okay. Ms. St. Clair, do you know why this
amendment was made to the Jedi/Chewco revolving loan agreement
in a separate document, given that it was dated the same day as
the principal agreement it was amending?
Ms. St. Clair. I don't know.
Mr. Greenwood. What do your initials signify? Why did you
put your initials on that document?
Ms. St. Clair. They signify that as the lawyer that was in
charge of representing Enron's side in the Chewco transaction,
that the document satisfied the legal criteria, that it was
okay for the officer to sign from a legal perspective.
Mr. Greenwood. Okay. But you don't know why it was drafted
in a separate document. I mean you looked at it and you decided
that it was okay for the executive to sign. You had done your
legal scrub of it----
Ms. St. Clair. Right.
Mr. Greenwood. [continuing] but in so scrubbing, you didn't
ascertain why it was a separate document.
Ms. St. Clair. I don't recall now why it was a separate
document; no, sir.
Mr. Greenwood. Do you recall any discussions in the fall of
1997 about this side agreement or the creation of reserve
accounts to benefit Barclay's who was lending money to Big
River and Little River, which in turn was providing the 3
percent outside equity in Chewco?
Ms. St. Clair. At this time, I have no independent
recollection of that, but as a result of reviewing my notes
during that time period, there appears to be meetings where
reserve accounts were discussed.
Mr. Greenwood. And your notes are those that we find in Tab
17 of the binder?
Ms. St. Clair. That is correct.
Mr. Greenwood. Okay. As you read through these notes, they
seem to reflect discussions regarding these reserve accounts
and how they would be funded from distributions to Chewco to
benefit the Big River/Little River lender, Barclay's. Now, you
do acknowledge that this subject was discussed in the meetings
at the time and that this side agreement with your initials on
it didn't just come out of thin air.
Ms. St. Clair. That is correct.
Mr. Greenwood. Okay. Who was at these meetings?
Ms. St. Clair. I don't have----
Mr. Greenwood. Let me help you. Your notes reflect that Mr.
Astin was in at least three of these meetings.
Ms. St. Clair. That is correct.
Mr. Greenwood. Mr. Glisan, who handled the accounting
aspects of this transaction for Enron, was in at least two.
Ms. St. Clair. Correct.
Mr. Greenwood. Okay. Was it your understanding that such
individuals, including Mr. Astin, Mr. Glisan, Mr. Brown and
other Enron employees and V&E attorneys, were aware of these
reserve accounts at the time of their creation back in 1997?
Ms. St. Clair. I can't speak for Vinson & Elkins, Bill
Brown and Ben Glisan, because they were--Ben was heading up the
accounting team, and Bill was on the commercial team would have
had the knowledge of the reserve accounts.
Mr. Greenwood. Who do you know that had--to your knowledge,
who had knowledge?
Ms. St. Clair. To the best of my knowledge, Ben Glisan and
Bill Brown.
Mr. Greenwood. How about Kristina Mordaunt?
Ms. St. Clair. At that time, I reported to her, and she was
my supervisor on this deal. I don't recall whether she was
present at any of the meetings, but I did report to her on this
particular deal, but I was handling the day-to-day activities
as the lawyer----
Mr. Greenwood. You told the committee in your interviews
prior to today that you were aware that a key aspect of the
Chewco deal was that there needed to be 3 percent outside
equity in the deal. Weren't you at all concerned when you
reviewed this side agreement, which in effect transferred $6
million from Enron Jedi to the purported outside equity
holders, Big River and Little River? Weren't you concerned
about that, that it would undo the 3 percent requirement?
Ms. St. Clair. I don't recall that I was concerned. I would
have looked to Ben Glisan who was interfacing with Arthur
Andersen to make sure that it would pass all the accounting
tests. And in looking at the side agreement now, I am not sure
that it actually says that the accounts were funded, it just
allocates a different distribution scheme to funds that Chewco
may be receiving. As to how the reserve accounts worked
themselves, we did not have access to those particular
documents.
Mr. Greenwood. How about you, Mr. Astin, can you shed any
light on this?
Mr. Astin. I would like very much to be helpful to you,
Congressman, but I don't have any independent recollection of
these meetings. I was in meetings at which the partnership
allocations of the Chewco side of the transaction were
discussed. I was primarily responsible for another aspect of
the transaction, which was Jedi II and was devoting most of my
attention to that. This was the first transaction involving
this accounting issue on which I had worked, and I was not
familiar with its significance in 1997.
Mr. Greenwood. You understood the 3 percent rule, right?
Mr. Astin. I understood, I believe, that the intention of
the parties was to have 3 percent equity. I did not----
Mr. Greenwood. Did you understand why they would pick 3
percent?
Mr. Astin. My understanding coming into this transaction
was primarily as a private equity and mergers and acquisitions
lawyer. I thought that the principal purpose, and I still
believe one of the principal purposes, of the leverage was to
maximize the potential returns from the Jedi portfolio of
assets since it was a mature portfolio of assets that was not
expected to greatly increase in value so that for it to become
an attractive equity investment by a third party, which was the
original plan, it would require additional leverage in order to
maximize the possibility of return on the investment.
Mr. Greenwood. Do you know why the side agreement was
written to begin with, why it was a separate document, why it
wasn't incorporated in the original document?
Mr. Astin. I have no memory of having seen it in 1997. I
only--I mean we have internal files that indicate a copy was
sent to me, but I was primarily working on another aspect of
the transaction.
Mr. Greenwood. You weren't aware that Barclay's had
insisted on this agreement.
Mr. Astin. No, I was not.
Mr. Greenwood. And how about you, Ms. St. Clair, were you
aware of that?
Ms. St. Clair. No, I was not.
Mr. Greenwood. My time has expired. The Chair recognizes
the gentleman from Florida, Mr. Deutsch.
Mr. Deutsch. Thank you, Mr. Chairman. Mr. Derrick, if you
could go to page 8 of the Vinson & Elkins report addressed to
you, and on that page, under the title--I will read it to you
if you can't get to it, but on the page, under the title,
``Potential Bad Cosmetics,'' the report states, ``Concern was
recently expressed that the transactions involving Condor and
White Wing and Raptor could be portrayed very poorly as
subjected to a Wall Street Journal expose or class action
lawsuit.'' What were your thoughts when you read that
statement?
Mr. Derrick. Well, my thoughts were of being concerned, but
there was nothing that I know of that could have been done at
this stage to have addressed that issue. It was something that
if it came, when it came, we would simply have to address.
Mr. Deutsch. So it didn't surprise or shock you that type
of activity----
Mr. Derrick. No, as I expressed, it was a concern to me.
The issue was given the concern, what at that point could the
company do about it? It was something that would happen or
wouldn't happen, and based on what happened we would have to
address it.
Mr. Deutsch. Do you recall what Mr. Lay's reaction was?
Mr. Derrick. I am sorry, I don't recall his reaction.
Mr. Deutsch. Mr. Dilg, these were your words, at least my
understanding is that you participated in the letter. Even
though it wasn't under your signature, it was under your
supervision. What did those words mean to you?
Mr. Dilg. We were conveying--concerns had been expressed to
us during our interviews, and we wanted to make sure the
company was aware of those concerns. Again, there wasn't--the
company was taking action or had taken action at the time this
letter was written to terminate the Raptor vehicles.
Mr. Deutsch. I mean is there a difference between the term
``bad cosmetics'' and ``unethical behavior'' or ``illegal
behavior?''
Mr. Dilg. I definitely think so. I think we were trying to
convey that there were aspects of these transactions that in
hindsight could be portrayed very badly.
Mr. Deutsch. And, Mr. Derrick, would that be your opinion
as well or a different take on it? You know, it is described as
potential bad cosmetics.
Mr. Derrick. Yes. Congressman, I did not take that to mean
that there had been unethical conduct or illegal conduct but
rather that it was simply what it was, that it could be
portrayed in a very unflattering light, and normally litigation
would follow that kind of publicity.
Mr. Deutsch. And Mr. Dilg, if you could try to, in your own
words, describe the difference between bad cosmetics and
unethical behavior?
Mr. Dilg. I think unethical behavior, in my words, in going
into the transaction, if people had an illegal motive or
something of that nature not fully disclosed, the motives, et
cetera. The bad cosmetics arose primarily because of the large
losses that had been incurred on the assets that were hedged
against the Raptor vehicles. That had nothing to do with the
intent of the parties at the beginning of the transactions. It
was a market factor that happened in the retail electric
business as well as the broadband business, et cetera, that
highlighted a lot of the cosmetic issues here. It was just the
amount of loss that was involved.
Mr. Deutsch. Mr. Rogers, do you want to add anything to
this?
Mr. Rogers. Are you asking my opinion of the report or just
the----
Mr. Deutsch. Well, I mean really in terms of this specific
thing, because, again, someone reading this--you know, I mean I
read the words exactly, and I think what we have just heard is
it portrayed in the best possible light, and was that accurate?
I mean saying that--even this report is saying that exposure of
what occurred could subject an expose or class action lawsuit,
and is this something that convinces you that there was
unethical or, for that matter, illegal activity occurring?
Mr. Rogers. I can't make a determination that there was
unethical or illegal activity from that; no, sir.
Mr. Deutsch. I mean in hindsight, does anyone think that
these activities or any of these partnership agreements were
unethical? Do any of you? I mean in the light of hindsight, in
light of what we know at this point.
Mr. Derrick. Well, I think let me say first I am sure all
of us would agree that while the investigation is still ongoing
and not every side has been heard from, that everyone does
deserve presumption of innocence. To the extent that it is
finally determined that in fact there was wrongdoing here, then
certainly I think we would agree there would have been
unethical conduct.
Mr. Deutsch. Right. I mean but no one at this point, based
on what we know, and particularly--again, I hate to keep
focusing on Mr. Fastow, but, again, I mean in hindsight,
looking at his activities as a general partner, my
understanding is he was telling the board or the board was
looking the other way or winking that he was not getting
compensation. I mean it was clear he was getting compensation.
I think Mr. Waxman's line of questioning is we still don't
know who else made money. We know for a fact that he made money
and that tens of millions of dollars in terms of these outside
partnerships, and yet with his fiduciary responsibility as the
CFO of the organization and it appears as if misrepresenting to
the board or the board looking the other way or sticking their
heads in the sand at that issue.
Mr. Greenwood. Time of the gentleman has expired. The Chair
recognizes the chairman of the full committee, Mr. Tauzin, for
5 minutes.
Chairman Tauzin. Thank you, Mr. Chairman. We do know from
Enron who some of those investors were. They reported to us in
some cases. Ben Glisan, managing director and treasurer of
Enron Corporation, was an investor in South Hampton Place.
Kristina Mordaunt was an investor. She was managing director
and general counsel of an Enron division. Kathy Lynn, vice
president of an Enron division; Ann Yaeger, an officer employee
of the company were investors.
We do know now that they invested rather sums. Kristina
Mordaunt, $5,800; Ben Glisan, $5,800; Ann Yaeger, $2,900; Kathy
Lynn, $2,300. As a return on their investments in 6 weeks,
Kristina Mordaunt made $1 million and Ben Glisan made $1
million and Ann Yaeger and Kathy Lynn each made $500,000,
approximately, on their investment. Any of you folks know that
that was going on before you wrote your October 15 report to
Mr. Derrick and to Mr. Lay? Mr. Dilg?
Mr. Dilg. Chairman Tauzin, we were not aware of the
investors in South Hampton at the time we wrote our report. I
believe I became aware of that early in November.
Chairman Tauzin. If you would have known that then, might
you have written a different report?
Mr. Dilg. Yes, sir.
Chairman Tauzin. I would think so. And yet I asked you a
while ago if you stood by your report, and you said you did.
Everything was honkey dory and that we didn't need to have
anybody outside look at this business.
Mr. Dilg. Based on the facts we knew at the time, I stand
by that submission.
Chairman Tauzin. Under the facts you knew at the time, you
stand by your report. Under the facts you know now, would you
have advised Mr. Derrick and Mr. Lay differently?
Mr. Dilg. I think if we had known of the South Hampton
investors, that would have raised a serious concern. We were--
--
Chairman Tauzin. Would you advise them then to get an
outside counsel, an outside auditor to come look at things?
Mr. Dilg. I am not sure on the auditor point, Chairman, but
we would have definitely advised further investigation into----
Chairman Tauzin. Let us talk about what you did know when
you wrote that report. You did know, did you not, that Michael
Kopper was running Chewco?
Mr. Dilg. I did not. We did not look at Chewco.
Chairman Tauzin. Now, wait a minute, wait a minute. You say
in your report, and I am going to quote from it, that, ``Based
on our review of the LJM deal approval sheets and accompanying
checklist, it appears the approval procedures were generally
adhered to.'' I am looking at one of them. It says Michael
Kopper negotiating for LJM. It says that Ben Glisan is
negotiating for Enron. You didn't see this?
Mr. Dilg. Could you refer me to which one you are looking
at?
Chairman Tauzin. I am looking at Raptor, Tab 20. While you
are looking for that, I am going to quote Mr. Skilling to you.
I was asking Mr. Skilling at a previous hearing with reference
to Chewco, and I asked him then if he had informed Mr. Lay that
Mr. Kopper was involved with Chewco and with LJM, and he said,
``I don't recall.'' We got a lot of that. Then I asked him--he
is not aware of what Ken knew, he said. But Mr. Kopper's
participation was well-known throughout the company.
And I started to go to Mr. Jaedicke, and he interrupted me.
He said, ``By the way,'' this is Mr. Skilling talking, ``it was
known by Vinson & Elkins who would have had responsibility,''
and I said, ``I am sorry, I didn't hear that. Say that again.''
And he said, ``His participation in Chewco was also known to
Vinson & Elkins, to my knowledge. It is my understanding that
Vinson & Elkins knew that he was involved. I believe that they
would have identified, to the extent there was a conflict of
interest, that a waiver needed to be received.''
I asked did Vinson & Elkins report to Mr. Lay or to you
after they researched the issue following Ms. Watkins' letter
that Mr. Kopper might require such a waiver. So at least Mr.
Skilling believed you knew. I am looking at an approval sheet
you say that you reviewed in your investigations that shows Mr.
Kopper is negotiating for LJM. Do you want to tell me now you
didn't know?
Mr. Dilg. We did not look--in the investigation that Mr.
Henderick and I undertook, we did not look at Chewco. I don't
believe this approval sheet----
Chairman Tauzin. This is a Raptor sheet.
Mr. Dilg. Yes. I don't believe it relates to Chewco.
Chairman Tauzin. Did you know that Kopper was working for
Raptor and LJM?
Mr. Dilg. We knew Mr. Kopper, based off of the approval
sheet, was negotiating on behalf of LJM.
Chairman Tauzin. Absolutely. In fact, when you flip the
approval sheet over, there is a question, was the transaction
done strictly at an arm's length basis, yes or no? It says yes.
You have got Kopper on one side negotiating for LJM, and you
have got Glisan on the other side negotiating for Enron, and
the documents says it is an arm's length transaction. It goes
on further to say, have all Enron employees' involvement in the
transaction, on behalf of LJM, been waived by the Enron Office
of Chairman, in accordance with the Enron's conflict of
business affairs policy? It is checked off, ``yes.'' Can you
tell us today whether in fact Mr. Kopper got a waiver?
Mr. Dilg. For working on this transaction?
Chairman Tauzin. For working on any transaction on the
other side of Enron. Apparently Mr. Fastow got such a waiver
for the conflict of interest rule somewhere, did he not?
Mr. Dilg. Mr. Fastow got a waiver from the Office of the
Chairman. It was approved by the full board, as I understand it
from the board minutes.
Chairman Tauzin. Right. And what is the procedure for that?
The Office of the Chairman approves the waiver first, then the
board approves it after, right?
Mr. Dilg. I believe that was the procedure followed in
terms of Mr. Fastow.
Chairman Tauzin. Mr. Derrick, is that correct?
Mr. Derrick. Yes. I wanted to clarify that. Under the Code
of Conduct, actually there is no required approval for anyone
by the board of directors. There is a----
Chairman Tauzin. But there is by the Office of the
Chairman.
Mr. Derrick. By the Office of the--well----
Chairman Tauzin. So the Office of the Chairman approved Mr.
Fastow. Did the Office of the Chairman approve Mr. Kopper, Mr.
Derrick?
Mr. Derrick. Was that directed to me, Congressman? The
answer----
Chairman Tauzin. Did the Office of the Chairman ever
approve a waiver for Mr. Kopper?
Mr. Derrick. I am not personally aware of such an approval.
Chairman Tauzin. So as counsel, you don't know, and you are
the general counsel. You don't know whether Mr. Kopper, who is
negotiating on LJM for LJM, against his own company, you don't
know whether he got a waiver?
Mr. Derrick. I don't because there is no requirement that
waivers come through the Legal Department, Mr. Congressman.
Chairman Tauzin. You signed the form, didn't you? Didn't
Mr. Sefton sign it? I am sorry, Mr. Sefton, could you help me
here, sir. You signed this form. Were you aware Mr. Kopper had
or did not have a waiver?
Mr. Sefton. My recollection is that Mr. Fastow advised me
that he was taking care of the waivers for the LJM people.
Chairman Tauzin. That is very nice. You can tell he took
care of it. Did you personally assure yourself before you
signed this document--you signed yes that the waiver was given.
You signed yes it was an arm's length transaction. Did you take
care to assure Mr. Kopper had a waiver?
Mr. Sefton. I had no reason to believe that Mr. Fastow was
not telling me the truth on that.
Chairman Tauzin. So you, as counsel, just took his word?
Mr. Sefton. I relied on his assurances.
Chairman Tauzin. And you, Mr. Dilg, when you investigated
this on behalf of the corporation for Mr. Derrick took the word
of the folks who signed this document that everything was okay,
even though you knew Kopper was--at that time you had to know--
was working for LJM and for Enron at the same time.
Mr. Dilg. We were given the board of directors' minutes
that approved the participation by Mr. Fastow. They designated
Mr. Buy and Mr. Causey to guard against the conflict of
interest. There was a service----
Chairman Tauzin. But what about Kopper? I am not asking
Fastow.
Mr. Dilg. Excuse me, there was a service agreement that
provided for the services of certain employees of Enron that
would be utilized on behalf of LJM. Mr. Kopper was listed in
that service agreement. That service agreement was signed by
Mr. Causey.
Chairman Tauzin. But you see what is troublesome for me is
that you are telling me if you would have known all these
corporate executives were investing in and playing on the other
side of the board, at the same time working in very responsible
positions for the corporation and earning all these amazing
amounts in 6 weeks, that you would have found that very
troubling, you would have written a different report. Knowing
what you know now, you might not stand by that report you
wrote.
But what I am troubled by is that you did know that Mr.
Kopper was involved. You had the approval sheets, you claimed
you reviewed them. And according to you, this is a report you
have given to Mr. Derrick and Mr. Lay who have just received a
report saying that they are running a corporate corporation.
They have just received a report--I will quote some of the
things that Ms. Watkins reported again.
Jeff McMahon was highly vexed over it and he heard
conflicts of LJM. He complained mightily to Jeff Skilling.
Cliff Baxter, who, as we know, ended up committing suicide,
complained mightily to Skilling and to all who would listen
about the inappropriateness of the transactions with LJM. This
was a report that you had in your hands that at least you were
going to look at. You weren't going to look at the accounting,
you were told not to do that, but you were going to look at the
conflicts.
Mr. Dilg. Yes, sir.
Chairman Tauzin. And you had this report from Ms. Watkins,
you have got these documents that show a very important officer
in the corporation negotiating for the outside partnership and
documents that say this is an arm's length transaction. You
didn't look behind any of these documents in this so-called
investigation to find out whether Ms. Watkins was telling Mr.
Lay the truth?
Mr. Dilg. The board had established procedures to guard
against the conflict of interest that they recognized with Mr.
Fastow's position in LJM. Those were to have the transactions
signed off by Mr. Buy and Mr. Causey. There was a service
agreement that we were provided that provided for Mr. Kopper to
work on behalf of LJM. That agreement was signed by Mr. Causey.
Chairman Tauzin. Now, we have to press again with this
hearing because we are checking with some banks. Because
according to Mr. McMahon, some of these banks were threatened
or promised other business if they didn't invest in these
partnerships. You knew about that, didn't you?
Mr. Dilg. Yes, sir. Mr. McMahon raised that in his initial
interview.
Chairman Tauzin. Did you interview any one of these banks?
Mr. Dilg. We did not.
Chairman Tauzin. You didn't interview the banks. You didn't
check on these transactions to see if Mr. Kopper had a proper
waiver from conflict of interest. Wasn't it your job?
Mr. Dilg. We were conducting a preliminary review to
determine whether an additional investigation was necessary.
Chairman Tauzin. Mr. Derrick, wasn't that your job? Wasn't
it somebody's job? Mr Sefton, wasn't it one of your jobs to
make sure that these people negotiating on the other side of
the table from their own corporation had been properly cleared
to do so? Whose job was it? According to Skilling, he is
throwing the blame at you pretty heavily right here. He is
saying,``It was their responsibility.'' He says, ``I left the
company. I don't know what they did after I left, but it was
their responsibility to report to the board and Mr. Lay that
this man needed a waiver. So don't blame me; blame Vinson &
Elkins'' is what he is saying. Should we blame Vinson & Elkins?
Mr. Dilg. No, sir.
Chairman Tauzin. Who should we look to? Who should Enron,
who should Mr. Lay look to when he asked the question of, ``Why
weren't we told Mr. Kopper was in a conflict of interest
position, that he wasn't negotiating at arm's length, that he
never received a waiver to do this.'' Who should bear the
responsibility for having, No. 1, known that and not done
something about it, and No. 2, checked on it when Sherron
Watkins went to the president of the corporation and said,
``You have got a corrupt company; check into it''?
Mr. Derrick. I think, initially, Congressman, the
responsibility lies with, in this case, Mr. Kopper. Under our
Code of Conduct, each employee is required to certify----
Chairman Tauzin. You have got to be kidding me, Mr.
Derrick. Any employee could go negotiate against a company and
it was up to them to come and get a waiver? And you guys were
signing these documents that said they had gotten waivers and
you never checked to see if they did?
Mr. Derrick. I am not saying that I have signed a
document----
Chairman Tauzin. I have got your Code of Conduct in front
of me. You are not supposed to engage in any outside activity
or enterprise which would interfere in any way with job
performance. You don't think Mr. Kopper was engaging in
enterprises that interfered with his performance? You don't
think these employees who were investing $5,000 and reaping $1
million reward in 6 weeks were in a conflict of interest
position?
Mr. Derrick. Well, that is exactly my point. They were, and
under our Code of Conduct, each of those individuals were
required to approach the chairman and chief executive officer
to seek an approval.
Chairman Tauzin. Lawyers of the company had to know they
were doing that. You admitted that to us. You have admitted to
us that you knew Kopper was doing that. Whose job was it to
tell them, ``You are in violation of the Code of Ethics. You
are fired.'' Or go to the president and say, ``Get rid of these
people. They didn't have the courtesy of complying with your
Board of Ethics requirements--your Code of Ethics
requirements.''
Mr. Derrick. Well, initially----
Chairman Tauzin. Whose job was that?
Mr. Derrick. Well, in my judgment, it was initially the
employee's. To the extent that people in the company became
aware that no conflict had been received, that was something
that they should have reported. But there isn't a way that I
know of for a company to, other than relying on the good faith
of its employees, under a Code of Conduct, who are required to
report conflicts of interest. That is where it all starts.
Chairman Tauzin. But what is a requirement of a lawyer who
is a counsel for the corporation who knows that an employee is
violating the Code of Ethics?
Mr. Derrick. Well, if----
Chairman Tauzin. What is the requirement of a counsel?
Mr. Derrick. If a lawyer knows that----
Chairman Tauzin. Yes.
Mr. Derrick. [continuing] as well as any other employee of
the company, if they know that, they should have reported it.
Chairman Tauzin. And you knew that Mr. Kopper was working
for LJM and had not received a waiver.
Mr. Derrick. I am sorry, Congressman, I wasn't working on
these transactions. I wouldn't know Mr. Kopper if he walked in
the conference room today.
Chairman Tauzin. Mr. Sefton, did you know Mr. Kopper was
working for LJM, and you don't think you had any responsibility
to do anything except Mr. Fastow's word, and Mr. Fastow got his
waiver, he is already working and making millions.
Mr. Sefton. At the time that I received those assurances, I
felt justified in relying upon them.
Chairman Tauzin. Mr. Chairman, you know what we have? We
have got the same kind of situation we had with Arthur Andersen
when they said the lawyers let the accountants make the
decisions about what their legal responsibilities were. I can't
believe that the lawyers at a great American corporation would
let the employees decide whether they could be in conflict of
interest like this and make these investments and reap these
benefits out of the very company that it was supposed to have a
fiduciary responsibility for. These are major offices of your
corporation. They are not workers at the bottom of the ladder;
they are workers at the top of the ladder.
It is amazing to me that you guys could write a report to
the chairman of the corporation after Ms. Watkins put herself
way out on a limb to tell you all that this was going on, and
you never bothered to talk to the banks, you never bothered to
call in Mr. Kopper and say, ``Did you get a waiver? Are you
operating in conflict of interest? Are you operating in a way
detrimental to the corporation when you owe your fiduciary
obligation to the corporation?'' It is amazing to me that you
could issue that paper to Mr. Lay, which basically said,
``Don't believe that lady; everything is fine. Everything is
find. Don't hire any other outside lawyers. Look at what we
did? For heaven's sake, don't hire any more accountants.
Everything is okay. Now, just tell that lady we looked at it
real carefully and everything is good.'' That is basically what
you did.
Mr. Dilg. Can I respond?
Chairman Tauzin. Please respond. Yes, sir, please.
Mr. Dilg. I think there are two things with regard to Mr.
Kopper that are different. One, his investment in the Chewco
matter, which was not raised by Ms. Watkins' letter and was not
at all within the scope of our inquiry, as far as looking at
Chewco. Mr. Kopper did negotiate on behalf of LJM and was
reflected as doing so in the LJM approval sheets that were
signed off on by the two people that the board had established
to make sure that the deals were done on a basis that was
favorable to Enron. There was a service agreement that was
signed by Mr. Causey on June 30, 1999 that recognized Mr.
Kopper's participation----
Chairman Tauzin. But Causey and Buy are in the Office of
the Chairman, you know that. They can't give waivers, you know
that. You just testified, or Mr. Derrick did, that the Office
of the Chairman was the only one that could give a waiver, not
Causey and Buy. Is that right?
Mr. Dilg. That is correct. We did not check on the waiver
of the Code of Ethics issues. There was an agreement signed by
the person that the board had designated to look after Enron's
side on this.
Chairman Tauzin. What do you think--and this is my final
question, Mr. Chairman, I apologize--what do you think when you
reviewed these approval sheets and you wrote a letter to Mr.
Derrick, extensively to him, and to Mr. Lay, saying, ``We
checked the approval sheets, and everything looks okay''? What
do you think when you saw a blank signature place for Mr.
Skilling? Didn't that alert you that something is maybe amiss
here?
Mr. Dilg. We did note in our letter that the Office of the
Chairman had not signed except on rare occasion. We wanted to
bring that to their attention. The board minutes that we----
Chairman Tauzin. Well, no, you said it differently. You
said that in most instances there was no approval signature for
the Office of the Chairman except for several significant
transactions. And that sort of leaves the impression the only
time he had to sign was for significant transactions. What was
your understanding of the approval process? Did the Office of
the Chairman have to approve these transactions?
Mr. Dilg. The board minutes that we had that approved the
LJM2 transaction and set up the approval process required Mr.
Buy and Mr. Causey to approve matters on behalf of Enron. There
was nothing in the board minutes that we had that required a
signature by the Office of the Chairman.
Chairman Tauzin. Mr. Jaedicke testified that his
understanding of the controls was that approval was required of
the Office of the Chairman, or at least a review was required.
We got into whether or not approval and review, but at least
review by the Office of the Chairman. You don't believe that is
true?
Mr. Dilg. I understand from the Powers report, which was
the first time that I was aware of the information, that at a
Finance Committee meeting in the fall of 2000, I believe, there
was discussion of approval by the Office of the Chairman, and
that was put in. Those minutes were not part of the minutes we
were given in connection with our review. I think those minutes
basically related to the formation of a new entity called LJM3
that didn't go forward. I am presuming that is why we didn't
see them. We were not present at that meeting.
Chairman Tauzin. But you did see a blank space.
Mr. Dilg. We did, and we noted that in our report.
Chairman Tauzin. What do you think? What do you think when
you saw a blank space from the chief executive of the
corporation on the approval forms?
Mr. Dilg. We felt that it was worth noting in our report
that those spaces had not been filled in.
Chairman Tauzin. Wasn't it a red flag?
Mr. Dilg. It was enough of a flag that we felt like it
should be brought to Mr. Derrick's attention.
Chairman Tauzin. But you never, never, never tried to talk
to Mr. Skilling.
Mr. Dilg. We did not try to talk to Mr. Skilling.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Greenwood. Thank you, Mr. Chairman. It is amazing how
much inquiry you can squeeze into a 5-minute period.
The Chair recognizes the gentlelady from Colorado for 5
minutes.
Ms. DeGette. Thank you, Mr. Chairman. And Chairman Tauzin,
when you were asking about the Code of Conduct, it occurred to
me we have reached new heights now, because it is not just the
fox guarding the hen house that we used to think about a week
ago, now it has become clear it is the fox guarding the fox. I
mean----
Chairman Tauzin. The hen is guarding the fox.
Ms. DeGette. Yes, or something. You know, the exact same
people who are the evildoers, who are committing these acts,
are the ones that are supposed to go somehow to the chairman
and say, ``Oh, by the way, I have these conflicts of
interest.'' It is unbelievable to me.
But I actually have a different line of questioning. What I
want to talk about is Mr. Fastow's compensation, because as I
read the Powers report and also some of the board committee
minutes, it looks to me like the Compensation and Management
Committee and also the Finance Committee told Enron that they
should figure out what Mr. Fastow's compensation was from LJM1
and LJM2. Is that correct, Mr. Derrick? In your view, were you
guys supposed to figure out how much Mr. Fastow was making?
Mr. Derrick. I don't recall a specific instruction from the
committee, Congresswoman. I think the compensation would come
up in terms of what is disclosed in the proxy statement. I
think what you may be referring to----
Ms. DeGette. But do you think that you should have found
out how much Mr. Fastow was making?
Mr. Derrick. Well, the teams that were working on the proxy
disclosure issues did examine that question, and my
understanding----
Ms. DeGette. Did you know how much Mr. Fastow was making?
Mr. Derrick. Pardon me?
Ms. DeGette. Did you know how much Mr. Fastow was making
from the LJM transactions?
Mr. Derrick. I did not. I was----
Ms. DeGette. Did anybody at Enron, to your knowledge?
Mr. Derrick. Not to my knowledge. My understanding is that
the team that was working on it had concluded it was simply not
practical to ascertain what the compensation was. But I will
need to----
Ms. DeGette. Did anybody ever ask Mr. Fastow?
Mr. Derrick. I can't speak to that.
Ms. DeGette. Who was running this team that was supposed to
be finding it out?
Mr. Derrick. Well, it would have been initially, I think,
Mr. Mintz, in the Global Finance Group, and other people
working with him.
Ms. DeGette. Okay. Do you know if Mr. Mintz tried to find
out from Mr. Fastow what his compensation was?
Mr. Derrick. I don't personally have knowledge of that.
Ms. DeGette. Mr. Rogers, do you think that management
should have obtained Mr. Fastow's compensation while he was at
LJM--or involved with LJM?
Mr. Rogers. Yes, ma'am; it is my understanding they did try
to find that out.
Ms. DeGette. And did you think they were supposed to find
that out?
Mr. Rogers. Yes.
Ms. DeGette. And in fact when you were interviewed on
January 20 by Wilmer Cutler you talked to them about
discussions that you had in a meeting in early 2001 whether
anybody knew the amount of compensation that Mr. Fastow was
receiving from the LJM transactions. Do you remember that
meeting in early 2001?
Mr. Rogers. I don't remember the date, but, yes, I remember
asking that.
Ms. DeGette. Okay. And did you ask anybody to find that
information out?
Mr. Rogers. Yes.
Ms. DeGette. You were concerned about that issue, weren't
you?
Mr. Rogers. I knew it was a disclosure issue, yes.
Ms. DeGette. And is that why you were concerned about it?
Mr. Rogers. Yes.
Ms. DeGette. Okay. And wasn't there a lot of conversation
around Enron that Mr. Fastow might need to disclose this
compensation from LJM on the 1999 and 2000 proxy statements?
Mr. Rogers. Not a lot of conversation that I was a party
to, but, yes, I understand it was discussed.
Ms. DeGette. Okay. But you were a party to conversations
that that information had to be obtained.
Mr. Rogers. Yes. I have read a lot of memos relating to
that, yes.
Ms. DeGette. You have read a lot of memos relating to that?
Mr. Rogers. Yes.
Ms. DeGette. Okay. And do we have those memos, do you know?
Mr. Rogers. I believe you do.
Ms. DeGette. Okay.
Mr. Rogers. I am confident you do.
Ms. DeGette. Did you ever try to get Mr. Fastow's
compensation from LJM?
Mr. Rogers. I didn't personally.
Ms. DeGette. Did you direct someone else to get that
compensation?
Mr. Rogers. I didn't direct someone, but someone undertook
to do so, yes.
Ms. DeGette. Who did?
Mr. Rogers. Mr. Mintz.
Ms. DeGette. Mr. Mintz. And do you know what Mr. Mintz did
to try to get his compensation, to get Mr. Fastow's
compensation from the LJM transactions?
Mr. Rogers. It is my understanding that he met with Mr.
Fastow, at least according to his memos, at some length.
Ms. DeGette. And as far as you know, Mr. Mintz was never
successful in getting those compensation figures from Mr.
Fastow, was he?
Mr. Rogers. I don't know if he was or was not. What Mr.
Mintz reported was that the compensation was not determinable
after his conversations with----
Ms. DeGette. Did Mr. Mintz say why?
Mr. Rogers. He makes references to it in his memo. I don't
remember the exact reasons. I believe it had something to do
with--well, first of all, a number of the transactions in that
year had not closed, so it was not determinable. With one of
the other transactions, there was an agreement between, as I
understand it, between Mr. Fastow and LJM, which rendered
whatever he had been paid something that was not a final number
that could be adjusted.
Ms. DeGette. Well, okay, you didn't have the final numbers,
but did you ever try to get a ballpark figure? Do you know if
Mr. Mintz ever got a ballpark figure?
Mr. Rogers. I don't know if he did or not.
Ms. DeGette. Didn't that concern you that Mr. Mintz was
unable to get this information that was supposed to be on the
financial statements?
Mr. Rogers. I don't think it is on the financial
statements.
Ms. DeGette. Okay.
Mr. Rogers. It may be on the proxy statements. But Mr.
Mintz is an outstanding lawyer. He undertook to get the
information.
Ms. DeGette. He testified in front of us, so, yes, we all
love him, but that is not my question.
Mr. Rogers. Well, what he reported back to----
Ms. DeGette. My question is did he ever try to get at least
a ballpark figure of what Mr. Fastow was making?
Mr. Rogers. I wasn't a party to the conversation between
Mr. Mintz and Mr. Fastow, but what Mr. Mintz reported back was
the number was not determinable at that time.
Ms. DeGette. Okay. Have you ever gotten that figure, to
this date?
Mr. Rogers. I have not personally gotten the number. The
only number I am aware of is the $30 million number that has
been published.
Mr. Greenwood. Time of the gentlelady has expired.
Ms. DeGette. So that is the number that--I would ask
unanimous consent for 1 additional minute.
Mr. Greenwood. Without objection. We are trying to be
sensitive to the members' travel schedules.
Ms. DeGette. Thank you. I have one too, Mr. Chairman.
Mr. Rogers. I am sorry, is there an open--is there a
question?
Ms. DeGette. Yes. The question I was asking was that is the
figure you read in the newspapers, the $30 million?
Mr. Rogers. I believe that number first was reported in an
8K current report that Enron filed subsequent to the SEC
investigation, in response to the SEC's questions. And my
understanding, if my recollection is correct, that the members
of the board spoke with Mr. Fastow.
Ms. DeGette. Okay. If you had known that $30 million at
that time in 2001, would you have been concerned about the red
flag that might raise as to these transactions?
Mr. Rogers. If I had known at the time that----
Ms. DeGette. Yes.
Mr. Rogers. [continuing] the number was $30 million?
Ms. DeGette. That was $30 million.
Mr. Rogers. Absolutely.
Ms. DeGette. Do you know to this day how much the real
number ever was?
Mr. Rogers. I do not.
Ms. DeGette. Mr. Derrick, did you know at that time how
much Mr. Fastow was making from the LJM transactions?
Mr. Derrick. No. I had been told by the team that it was
not practical to ascertain that because of these various open
positions.
Ms. DeGette. And have you ever yet found out how much he
made from those transactions?
Mr. Derrick. The only thing I can add is, what Mr. Rogers
referred to, was when the board elected or chose two of its
members to sit down with Mr. Fastow and ask that question. And
the number that has been referred to is, I believe, the number
that Mr. Fastow told to those two members of the board.
Ms. DeGette. And that was in the Powers report?
Mr. Derrick. I believe that is in the Powers report.
Ms. DeGette. Okay. And if you had known at least that $30
million at the time, would that have raised a red flag for you?
Mr. Derrick. Yes, Congresswoman; it certainly would have.
Ms. DeGette. And to this day----
Mr. Greenwood. The time of the gentlelady----
Ms. DeGette. [continuing] do you have any idea how much Mr.
Fastow made from LJM?
Mr. Derrick. The only information I have is what I have
just reported.
Ms. DeGette. Thank you.
Mr. Greenwood. The Chair recognizes the gentleman from
Florida for 5 minutes.
Mr. Stearns. Thank you, Mr. Chairman, and let me just say
to the witnesses you came here voluntarily and we appreciate
what you are doing, and we understand that you haven't had
lunch and so we are very sensitive to that. But I think what we
are all having trouble with is that people were making large
sums of money and no one on this panel has any concern or
doesn't stop to blow the whistle. It is like the three monkeys
who see no evil, hear no evil and speak no evil. And you folks
are unfortunately communicating that kind of sense to us that
you would not have changed a thing and you did nothing wrong. I
mean in retrospect, Mr. Derrick, do you think there has been
any corporate malfeasance at all during this whole process?
Mr. Derrick. Well, you say change nothing. In my opening
testimony, I have said that had I been given the gift of
clairvoyance, had I been able to foresee these events, I
certainly would have done things differently. In fact, if it
were within my power to go back and change anything, whatever
it may be, that would have prevented us from being where we are
now, certainly, Congressman, I would have done that.
But in terms of corporate malfeasance, I have no reason to
believe that--when the board considered this, it honestly
believed that it was taking decisions that it thought was not
adverse to the best interest of Enron and put in place
procedures that they honestly believed would protect those
interests.
Mr. Stearns. So today, Mr. Derrick, do you think there has
been any corporate malfeasance, just yes or no?
Mr. Derrick. Well, if the allegations that have been made
at the end of the day prove to be true, then the answer is yes.
Mr. Stearns. Mr. Dilg, do you think there has been
corporate malfeasance based upon what you have seen?
Mr. Dilg. We were very disheartened to see some of the
things that came out in November. The participants in South
Hampton was a great surprise to us.
Mr. Stearns. So you see things today that would indicate,
if true, it is corporate malfeasance.
Mr. Dilg. The ownership of and interest in a company doing
business with Enron without going through the proper Code of
Conduct waivers, et cetera, raises grave concerns to me.
Mr. Stearns. The question has come up of a $40 million that
Mr. Fastow, the CFO, made. Mr. Derrick, you met with 10 members
of our staff, one of those was on a telephone hookup. And per
that discussion they had with you, you left a message with Lay
and Skilling that it was not practical to determine Fastow's
compensation but that it would be disclosed in the year 2002
and that you were not aware of Fastow's compensation at that
point. But for the September 1 board meeting, you said you
wrote a list of questions for the board to ask Mr. Fastow, and
ultimately it was decided the chairman of the Executive
Committee, John Duncan, and the Compensation Committee would
sit down with Mr. Fastow outside the meeting, which they did,
you said. At a board meeting after that, they reported that
Fastow made $40 million. Is that true? Do you still stand by
your statements to our staff?
Mr. Derrick. With respect--yes, I do, with one exception. I
believe I made it clear that as to the $40 million I can't be
clear as to whether that was the amount. It may have been $30
million. But as to the other things you said, yes, I do,
Congressman.
Mr. Stearns. So you did not know that he made--let us say
$40 million just for the discussions--that he made $40 million
on these business transactions, and you did not know that
before the September 1 board meeting. Is that true?
Mr. Derrick. I am taking your word it is September 1, but,
yes, that board meeting. Yes, that is correct.
Mr. Stearns. Mr. Sefton, did you know that before September
1 board meeting that Mr. Fastow was making $40 million?
Mr. Sefton. No. And was that September 1, 2001?
Mr. Stearns. Yes, 2002.
Mr. Sefton. 2002. I left Global Finance in 2000.
Mr. Stearns. Okay. I have--it is Tab number 22 that Mr.
Fastow signed. It is a proxy statement talking as of holdings
of equity securities in the company. And on the last page, he
talks about, in response to questions, he says--they are
talking about his salary and his affiliates and his shares, and
he said, ``I suggest that you talk to Scott Sefton if you want
to talk about my arrangements, my salary, and that Scott Sefton
is preparing a draft of the disclosure relating to these
transactions, which he will provide shortly.'' Do you remember
preparing a draft of disclosure on Mr. Fastow?
Mr. Sefton. Yes.
Mr. Stearns. And what did that disclosure say?
Mr. Sefton. It was for the proxy for 2000.
Mr. Stearns. And it did not talk at all about his salary
and how much his compensation was.
Mr. Sefton. The disclosure that I worked on was for the
related party transactions.
Mr. Stearns. Did you have an understanding of how much he
made before you left the company?
Mr. Sefton. No.
Mr. Stearns. So all during the process you never understood
it. You never knew how much he made.
Mr. Sefton. No.
Mr. Stearns. Mr. Rogers, did you?
Mr. Rogers. No, sir.
Mr. Stearns. And Mr. Dilg, do you?
Mr. Dilg. I did not know until the results came back from
the meetings with Mr. Duncan and the other board member.
Mr. Stearns. Mr. Astin?
Mr. Astin. No, Congressman, not until the report that Mr.
Rogers referred to, the 8K filing that first disclosed the
number.
Mr. Stearns. And Ms. St. Clair? okay. Thank you, Mr.
Chairman.
Mr. Greenwood. Thank you. The Chair recognizes the
gentleman from California for 5 minutes.
Mr. Waxman. Thank you very much, Mr. Chairman. One of the
most disturbing facts to emerge from Congress' investigation of
the Enron collapse is the extent to which the company lobbied
for and took advantage of inadequate regulation and oversight
by legislators and regulators. If not for Enron's political
connections and power, the company's true financial status
might have been uncovered long ago. I would like to ask some
questions about those political connections.
From 1989 to 2001, Enron's PAC, Political Action Committee,
and its employees and family members gave close to $6 million
to Federal candidates and political parties. Press reports
indicate that employees were, at the very least, strongly
encouraged to make political contributions. One press report
has cited a 2000 company memo that recommended employees give
money to President Bush's campaign. Are any of you aware of
this particular memo?
Mr. Derrick. It is certainly possible that I would have
seen it at the time, Congressman. I don't have specific
recollection of it now.
Mr. Waxman. Okay. Any of the others. Mr. Sefton, are you
aware of any memo asking employees to contribute?
Mr. Sefton. I don't recall a memo relating to the Bush
campaign, but the employees of the company were asked from time
to time to consider contributions to, I think, a Political
Action Committee that was set up by the company.
Mr. Waxman. And how were they asked, through a memo,
through written communication?
Mr. Sefton. Probably a memo or an e-mail.
Mr. Waxman. Anybody else recall seeing any memos or being
aware of this information? Mr. Rogers?
Mr. Rogers. Yes, sir. I don't recall any specific request
to support a specific candidate. I do recall getting Political
Action Committee materials. The company did--there was no
obligation on any employee to join the PAC, but the company--
all the employees were given the opportunity to, and I think
the company did endorse being a member of the PAC. But there
were no--nothing negative would happen to an employee if he did
not join the PAC.
Mr. Waxman. Were any of them, when they were told they
could voluntarily do this, given a suggested amount they ought
to contribute?
Mr. Rogers. Not to my recollection.
Mr. Waxman. Anybody else have a----
Mr. Rogers. It is possible, I don't recall.
Mr. Waxman. Well, according to a press story, low-level
employees were encouraged to give $500, and senior executives,
at least $5,000. Do you know whether that would have been
accurate?
Mr. Rogers. I don't recall, but it would be very easy to
find out.
Mr. Waxman. Did any of you, as lawyers for Enron, advise
the company on campaign-related matters?
Mr. Derrick. No, but we did have an employee who was
charged, not as 100 percent of her job, but as part of her job
was advising the PAC issue.
Mr. Waxman. Okay. And could you identify for the record, if
not right now, who the employee had been----
Mr. Derrick. Certainly; I will be happy to.
Mr. Waxman. And, Mr. Rogers, you say it would have been
easy to find out if a memo had been sent out. How would we go
about finding out that information?
Mr. Rogers. I would guess the company would have records of
the materials that it would send out with respect to the Enron
PAC.
Mr. Waxman. The Washington Post reported that a letter was
allegedly sent by Ken Lay to certain employees in the spring of
1999 asking for contributions to the Bush campaign. One
recipient of the letter, according to the press report, said it
was a rather menacing letter. Are any of you aware of this or
other letters or memos from Ken Lay encouraging employees to
contribute to the Bush campaign?
Mr. Derrick. Congressman, I may have received a letter, not
in Mr. Lay's capacity as the chairman of Enron, but in this
private capacity. I know he was active for a number of
candidates, one of whom was President Bush. And, certainly, I
made a number of contributions to various candidates, and one
of those would have been to Mr. Bush.
Mr. Waxman. And when you gave contributions to a number of
candidates, were they at the request of Mr. Lay?
Mr. Derrick. There would have been some of those, but it
was my philosophy to try to support good candidates on both
sides of the aisle. And only a small fraction of those would
have been the result of any communication from Mr. Lay. But,
again, it would have been in Mr. Lay's capacity, not as
chairman of Enron but rather as a private citizen.
Mr. Waxman. Are you aware of any campaign contributions
being reimbursed, like bonuses or other compensation intended,
in effect, to reimburse employees for what they gave
politically?
Mr. Greenwood. Last question, Mr. Waxman.
Mr. Waxman. I would like to have Mr. Rogers answer it was
well.
Mr. Derrick. I have no personal recollection of any such
reimbursement.
Mr. Waxman. Mr. Rogers, are you aware of that?
Mr. Rogers. Let me make sure I understand the question.
Would you restate that, please?
Mr. Waxman. What I am trying to find out is whether you are
aware of any additional compensation that was given to
employees or executives to make up for the contributions they
would have given to campaigns?
Mr. Rogers. I am not aware of that.
Mr. Waxman. Are any of you aware of that?
Mr. Greenwood. Apparently not. The time of the gentleman
has expired.
Mr. Stearns. Mr. Chairman, just a point of information. I
think in all fairness, if the question is going to be asked of
the President, I think the gentleman from California should
also ask it of President Clinton too, his same questions.
Mr. Waxman. I think that is reasonable. I want to know if
any political campaigns.
Mr. Greenwood. I think the record has demonstrated that the
Enron employees and Enron Political Action Committee, as well
as Enron soft money, went generously to both sides of the
aisle, this election cycle and previous election cycle.
The Chair thanks the gentlemen and lady for their testimony
today. This committee has held 4 days of hearings on the
collapse of Enron, and we have done that because this is the
largest bankruptcy in the history of the country. We have done
that because not only did 4,000 Enron employees, at least, lose
their jobs, pensions lost, but teachers' funds, retirement
funds across the country were lost, $70 billion. Funds invested
by parents for their children's education lost because of
investments in Enron. There has been a lot of human suffering
as a result of this collapse, not the least of which, of
course, is the tragic death of Mr. Baxter.
It has been interesting to this member that this collapse
happened at a time when all of the commodities in which this
company was trading were in high demand in the country. You had
good supplies, you had great demand, all of the economic
reasons for this company to succeed were in place. And yet it
failed. The accountants have come in and told us that it didn't
fail because of anything they have done, no one from the
company's management has said it has failed because of anything
that they have done wrong, and none of you have indicated today
that the company because of anything that you have done wrong.
My final question for you, in retrospect and without the
gift of clairvoyance, as you look back upon this failure, what
happened? Who caused the failure of Enron. Mr. Derrick?
Mr. Derrick. Well, there are brighter people than I who are
looking at this issue. From my perspective, Congressman, it was
a loss of confidence and panic selling. I believe--I am not a
businessman, I am not a financial person, but certainly it was
my sense that the company still had enormous opportunities.
There was, as some have said, a run on the bank----
Mr. Greenwood. It wasn't loss in confidence that you could
sell natural gas and electricity and--it wasn't like
automobiles were made and people lost confidence in the ability
to sell buggy whips, was it? It was loss of confidence in the
management, was it not?
Mr. Derrick. I can't speak to that. I can't say that you
are wrong on that. I don't know. But experiencing from the
inside, it was simply a panic sale of our shares based on what
seemed to be a loss of confidence, and I think had the company
had some opportunity to have had a circuit breaker in place,
that it might have saved many, many people from the tragedy
that they have undergone.
Mr. Greenwood. Well, it would be my final observation--
first, without objection, I would like to put into the record
the documents to which we have referred today and identified
as, ``O&I Financial Collapse of Enron, March 14, 2002.''
My only comment in closing would be that once again the
commentary from the witnesses is that the company failed
because of loss of confidence of the investors, which sounds an
awful lot to me like blaming the victims, the people who lost
the money failed because they failed to have confidence in the
company itself.
This hearing is adjourned.
[Whereupon, at 3 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
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