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 78–506CC 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 Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 W:\DISC\78506 pfrm17 PsN: 78506 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, Mississippi GENE GREEN, Texas VITO FOSSELLA, New York KAREN MCCARTHY, Missouri ROY BLUNT, Missouri TED STRICKLAND, Ohio TOM DAVIS, Virginia DIANA DEGETTE, Colorado ED BRYANT, Tennessee THOMAS M. BARRETT, Wisconsin ROBERT L. EHRLICH, Jr., Maryland BILL LUTHER, Minnesota STEVE BUYER, Indiana LOIS CAPPS, California GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana JOSEPH R. PITTS, Pennsylvania JANE HARMAN, California 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) 2 VerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 W:\DISC\78506 pfrm17 PsN: 78506 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) 3 VerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00003 Fmt 0486 Sfmt 0486 W:\DISC\78506 pfrm17 PsN: 78506 VerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00004 Fmt 0486 Sfmt 0486 W:\DISC\78506 pfrm17 PsN: 78506 FINANCIAL COLLAPSE OF ENRON CORPORA- TION, 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 (chair- man) 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, ma- jority counsel; Brendan Williams, legislative clerk; Mike Geffroy, majority counsel; Will Carty, legislative clerk; Peter Kielty, legisla- tive 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 wel- come to the Subcommittee on Oversight and Investigations’ ongo- ing 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 em- ployees. This encompasses executives at every level, corporate accounting teams, corporate counsel, senior managers, and the Board of Direc- tors. 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 state- ment. 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 (1) VerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 W:\DISC\78506 pfrm17 PsN: 78506 2 this company’s unparalleled failure. As a result of this effort, we have been able to slowly parse the complex of self-dealing trans- actions that contributed to Enron’s dramatic descent into bank- ruptcy. 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 part- nerships, hedges, collars, and various other off-the-books trans- actions 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, commis- sion, did Enron’s corporate governance team play in the slide into bankruptcy and the increasing reliance on riskier and riskier trans- actions 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 Di- rectors and senior management failed to red flag flagrant issues of conflict of interest and highly questionable transactions behind sev- eral 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 pre- vent the ensuing disaster. A few courageous individuals attempted to raise the alarm, but either their warnings came too late or too half-heartedly. Or per- haps 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 hid- den dangers and to protect the interests of Enron and its share- holders? Where were the professionals whose job it was to ferret out wrongdoing and guard against malfeasance? What, if any, ac- tions did they either take or recommend to put an end to those ir- responsible 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 at- torneys, Enron’s inside and outside counsel. VerDate Jun 13 2002 08:36 Jul 17, 2002