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FINANCIAL COLLAPSE of ENRON—Part 3

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FINANCIAL COLLAPSE of ENRON—Part 3 THE FINANCIAL COLLAPSE OF ENRON—Part 3 HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON ENERGY AND COMMERCE HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS SECOND SESSION FEBRUARY 14, 2002 Serial No. 107–89 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 77–991CC WASHINGTON : 2002 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00001 Fmt 5011 Sfmt 5011 W:\DISC\77991 pfrm17 PsN: 77991 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 STEVE LARGENT, Oklahoma BART GORDON, Tennessee RICHARD BURR, North Carolina PETER DEUTSCH, Florida ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois GREG GANSKE, Iowa ANNA G. ESHOO, California CHARLIE NORWOOD, Georgia BART STUPAK, Michigan BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York JOHN SHIMKUS, Illinois TOM SAWYER, Ohio HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland JOHN B. SHADEGG, Arizona GENE GREEN, Texas CHARLES ‘‘CHIP’’ PICKERING, 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 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 STEVE LARGENT, Oklahoma DIANA DEGETTE, Colorado RICHARD BURR, North Carolina CHRISTOPHER JOHN, Louisiana ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois Vice Chairman JOHN D. DINGELL, Michigan, CHARLES F. BASS, New Hampshire (Ex Officio) W.J. ‘‘BILLY’’ TAUZIN, Louisiana (Ex Officio) (II) 2 VerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00002 Fmt 0486 Sfmt 0486 W:\DISC\77991 pfrm17 PsN: 77991 C O N T E N T S Page Testimony of: Watkins, Sherron, Vice President of Corporate Development, Enron Cor- poration .......................................................................................................... 14 (III) 3 VerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00003 Fmt 0486 Sfmt 0486 W:\DISC\77991 pfrm17 PsN: 77991 VerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00004 Fmt 0486 Sfmt 0486 W:\DISC\77991 pfrm17 PsN: 77991 THE FINANCIAL COLLAPSE OF ENRON—Part 3 THURSDAY, FEBRUARY 14, 2002 HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, Washington, DC. The subcommittee met, pursuant to notice, at 11 a.m., in room 2322, Rayburn House Office Building, Hon. James C. Greenwood (chairman) presiding. Members present: Representatives Greenwood, Bilirakis, Stearns, Largent, Burr, Tauzin (ex officio), Deutsch, Stupak, Strick- land, DeGette, John, Rush, and Dingell (ex officio). Also present: Representatives Ganske, Markey, Green, and Jack- son-Lee. Staff present: Tom DiLenge, majority counsel; Mark Paoletta, majority counsel; Michael Geffroy, majority counsel; Peter Kielty, legislative clerk; Will Carty, legislative clerk; Brendan Williams, legislative clerk; Edith Holleman, minority counsel; Consuela Washington, minority counsel; Jonathan Cordone, minority counsel; and Chris Knauer, minority investigator. Mr. GREENWOOD. Good morning. This hearing of the Oversight and Investigations Subcommittee of the Energy and Commerce Committee will come to order. The Chair recognizes himself for an opening statement. ‘‘I wish we could get caught. We’re such a crooked company.’’ Of all of the words in the now famous memo our witness sent to Ken- neth Lay in August of last year, these might be the most chilling. According to this morning’s witness, the person who uttered those words was a management level employee of Enron, a team player, a person who probably stood to lose a great deal in any fi- nancial collapse at Enron. What is the truth behind Enron’s pre- cipitous collapse? This morning we have before us, as our sole witness, Ms. Sherron Watkins, Enron’s Vice President of Corporate Develop- ment. Ms. Watkins has become known as the lone voice who sought to warn Enron Chairman and CEO Ken Lay that Enron was in danger of imploding ‘‘in a wave of accounting scandals.’’ Subse- quent events have proved the truth of that unvarnished assess- ment. But we now understand from evidence this committee has gath- ered in its investigation, from the materials contained in the Pow- ers Report, and from testimony of senior Enron officials at last week’s hearing, that these so-called aggressive accounting practices were used to hide an even larger business failure. (1) VerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00005 Fmt 6633 Sfmt 6633 W:\DISC\77991 pfrm17 PsN: 77991 2 Last week we took testimony from two senior Enron officials, Jordan Mintz and then treasurer, now Enron President and Chief Operating Officer, Jeffrey McMahon. They, too, anguished that something was terribly wrong at Enron, but were unable to deter- mine the full extent of the problems or the dangers ahead. Unlike them, our witness this morning was privy to substantially more evidence of the accounting practices used to hide various re- lated party transactions between Enron and what are known as the Raptor entities—special purpose entities owned by LJM2, the lim- ited partnership set up and run by Enron and its former Chief Fi- nancial Officer, Andrew Fastow. She will testify today that, in her opinion, these transactions were outright manipulations of Enron’s income statements, booking fictitious income, and hiding actual losses. Ms. Watkins took her concerns right to the top. She wrote a memo to Mr. Lay on August 15 that set forth in stark terms the seriousness of Enron’s situation and the dire consequences that would inevitably result if corrective action were not taken, and soon. We now know that Ms. Watkins also met with Mr. Lay not just once, as has been previously disclosed, but on two additional times in late October of last year, to further share her concerns and to urge that Enron restate its income statements for the past 2 years due to the deceptive transactions with the Raptors special purpose entities. Yet, until the Powers Report came out 2 weeks ago affirm- ing her analysis of the Raptors, no one at Enron, or Andersen ever sought to address these concerns. Indeed, the actions taken by Enron in October and November of last year to revise its earnings and shareholder equity numbers still fail to address many of the concerns raised by Ms. Watkins and confirmed by the Powers Report. Ms. Watkins also will describe today her meetings and conversa- tions with others throughout Enron’s corporate hierarchy, as well as with outside advisors. This included Mr. McMahon, Associate General Counsel, Rex Rogers, Vice President for Human Resources Cindy Olson, James Hecker, an Andersen audit partner, and Vin- son & Elkins managing partner Joe Dilg. Her initial meeting with Mr. Lay in August prompted an inves- tigation by Vinson & Elkins, assisted by Andersen, the very two parties Ms. Watkins urged Mr. Lay and others not to include in the review because of clear conflicts of interest. Not surprisingly, the report that Vinson & Elkins issued on October 15 was so flawed that Ms. Watkins seriously considered leaving the company. Instead, she persisted in her attempts to convince Mr. Lay of the enormity of the challenge facing Enron and the failure of outside experts to clearly state the facts. It wasn’t until October 31 that Ms. Watkins learned that a Special Committee of the Board of Di- rectors would examine Enron’s questionable business practices. This investigation has since become known as the Powers Inquiry. Ms. Watkins’ appearance and testimony before us today will be the first time anyone has had the opportunity to question her pub- licly about her own actions and how individuals at the highest level in the company responded to her warnings. VerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00006 Fmt 6633 Sfmt 6633 W:\DISC\77991 pfrm17 PsN: 77991 3 Let me point out that Ms. Watkins is not a whistleblower in the conventional sense. She was, and is, a loyal company employee, who sought valiantly, and sadly in vain, to get the people in charge to face the facts and make the hard choices needed to save the com- pany. Ms. Watkins is still an Enron employee, and because of this fact has requested a subpoena compelling her testimony today. I want to point out, however, that she has been responsive to and very cooperative with our investigators. And I look forward to her sharing with the subcommittee and the American public, in her own words, how it came to be that, at the end, a once faithful em- ployee concluded that her company was cooking the books.
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