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Fall of Enron: How Could It Have Happened? Hearing

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Fall of Enron: How Could It Have Happened? Hearing S. Hrg. 107–376 THE FALL OF ENRON: HOW COULD IT HAVE HAPPENED? HEARING BEFORE THE COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED SEVENTH CONGRESS SECOND SESSION JANUARY 24, 2002 Printed for the use of the Committee on Governmental Affairs ( U.S. GOVERNMENT PRINTING OFFICE 78–614 PDF 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 11-MAY-2000 13:20 Aug 12, 2002 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 78614.TXT SAFFAIRS PsN: SAFFAIRS COMMITTEE ON GOVERNMENTAL AFFAIRS JOSEPH I. LIEBERMAN, Connecticut, Chairman CARL LEVIN, Michigan FRED THOMPSON, Tennessee DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska RICHARD J. DURBIN, Illinois SUSAN M. COLLINS, Maine ROBERT G. TORRICELLI, New Jersey GEORGE V. VOINOVICH, Ohio MAX CLELAND, Georgia PETE V. DOMENICI, New Mexico THOMAS R. CARPER, Delaware THAD COCHRAN, Mississippi JEAN CARNAHAN, Missouri ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota JIM BUNNING, Kentucky JOYCE A. RECHTSCHAFFEN, Staff Director and Counsel CYNTHIA GOOEN LESSER, Counsel DAVID M. BERICK, Professional Staff Member HANNAH S. SISTARE, Minority Staff Director and Counsel WILLIAM M. OUTHIER, Minority Investigative Counsel DARLA D. CASSELL, Chief Clerk (II) VerDate 11-MAY-2000 13:20 Aug 12, 2002 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 78614.TXT SAFFAIRS PsN: SAFFAIRS C O N T E N T S Opening statement: Page Senator Lieberman ........................................................................................... 1 Senator Thompson ............................................................................................ 4 Senator Levin .................................................................................................... 6 Senator Collins ................................................................................................. 9 Senator Durbin ................................................................................................. 11 Senator Cochran ............................................................................................... 12 Senator Torricelli .............................................................................................. 12 Senator Voinovich ............................................................................................. 14 Senator Cleland ................................................................................................ 16 Senator Bennett ................................................................................................ 18 Senator Carper ................................................................................................. 19 Senator Bunning ............................................................................................... 20 Senator Carnahan ............................................................................................ 21 Senator Dayton ................................................................................................. 23 WITNESSES THURSDAY, JANUARY 24, 2002 Hon. Arthur Levitt, Jr., former Chairman, U.S. Securities and Exchange Commission ........................................................................................................... 26 Lynn E. Turner, former Chief Accountant, U.S. Securities and Exchange Commission ........................................................................................................... 29 Bruce B. Henning, Director, Regulatory and Market Analysis, Energy and Environmental Analysis, Inc. .............................................................................. 54 John H. Langbein, Sterling Professor of Law and Legal History, Yale Law School .................................................................................................................... 56 Frank Partnoy, Professor of Law, University of San Diego School of Law ........ 58 ALPHABETICAL LIST OF WITNESSES Henning, Bruce B.: Testimony .......................................................................................................... 54 Prepared statement with attachments ........................................................... 84 Langbein, John H.: Testimony .......................................................................................................... 56 Prepared statement .......................................................................................... 93 Levitt, Hon. Arthur Jr.: Testimony .......................................................................................................... 26 Prepared statement .......................................................................................... 75 Partnoy, Frank: Testimony .......................................................................................................... 58 Prepared statement .......................................................................................... 103 Turner, Lynn E.: Testimony .......................................................................................................... 29 Prepared statement with an attachment ....................................................... 78 APPENDIX Chart entitled ‘‘Market Losses to Investors After Corporate Restatements’’ (submitted by Senator Torricelli) ........................................................................ 135 Chart entitled ‘‘Corporate Restatements Have Increased Dramatically in the Last Three Years’’ (submitted by Senator Torricelli) ........................................ 136 Chart entitled ‘‘Corporate Overstatements in the Past Decade’’ (submitted by Senator Torricelli) ........................................................................................... 137 (III) VerDate 11-MAY-2000 13:20 Aug 12, 2002 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 78614.TXT SAFFAIRS PsN: SAFFAIRS IV Page Questions for the Record with responses from: Mr. Levitt .......................................................................................................... 138 Mr. Langbein .................................................................................................... 142 Mr. Partnoy ....................................................................................................... 150 VerDate 11-MAY-2000 13:20 Aug 12, 2002 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 78614.TXT SAFFAIRS PsN: SAFFAIRS THE FALL OF ENRON: HOW COULD IT HAVE HAPPENED? THURSDAY, JANUARY 24, 2002 U.S. SENATE, COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC. The Committee met, pursuant to notice, at 10:07 a.m., in room SH–216, Hart Senate Office Building, Hon. Joseph I. Lieberman, Chairman of the Committee, presiding. Present: Senators Lieberman, Thompson, Levin, Collins, Durbin, Cochran, Torricelli, Cleland, Carper, Carnahan, Dayton, Voinovich, Bennett, and Bunning. OPENING STATEMENT OF CHAIRMAN LIEBERMAN Chairman LIEBERMAN. This hearing will come to order. Good morning. With this hearing, the Senate Governmental Af- fairs Committee begins its investigation of the Enron scandal, the spectacular rise and fall of an American corporation and the dev- astating effects its collapse has had on its employees and retirees, on its shareholders and customers, and on the confidence many Americans have in the markets and in their government. The basic facts of this story are now well known. Less than a year and a half ago, Enron was ranked as the seventh largest cor- poration in America. The energy trading company was a bright star on Wall Street, a juggernaut trading at $90 a share at its height, with revenue over $100 billion. Stock analysts could not rec- ommend it fast enough, and the company made millionaires of many loyal employees who invested their life savings in its stock. Then last month Enron’s bright star collapsed into a black hole, when it abruptly declared bankruptcy and was exposed as a house of cards built on greed and deceit. To add insult to injury, average workers and investors were cheated out of their life savings, while a small group of executives and insiders made off with hundreds of millions of dollars from well-timed stock sell-offs. Today, the company’s stock is worth pennies, and it is no longer traded on the New York Stock Exchange. Five thousand of its em- ployees are out of a job, and thousands more are reeling in the ruin of their retirement dreams. One of the Nation’s top accounting firms, Arthur Andersen, is accused of helping to conceal Enron’s li- abilities instead of reporting them. Public and private employee pension funds from Florida to California have lost billions of dol- lars, and at a time when over 60 percent of Americans own stock, in one way or another, the confidence of the investing public in the stock market has been shaken. (1) VerDate 11-MAY-2000 13:20 Aug 12, 2002 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 78614.TXT SAFFAIRS PsN: SAFFAIRS 2 So this is not just a tempest in a teapot. It is an unprecedented corporate storm that has already hurt thousands of people and now leaves dark clouds over America’s economy and American’s con- fidence in their future personal economic security. This scandal cries out for thorough congressional investigation to make sure that nothing like this ever happens again. Yet, because Enron has made substantial political contributions to Members of Congress and the Executive Branch, some have questioned the capacity of any congressional
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