S. HRG. 107–773 COLLAPSE OF ENRON HEARING BEFORE THE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION UNITED STATES SENATE ONE HUNDRED SEVENTH CONGRESS SECOND SESSION FEBRUARY 12, 2002 Printed for the use of the Committee on Commerce, Science, and Transportation ( U.S. GOVERNMENT PRINTING OFFICE 82–951 PDF WASHINGTON : 2005 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 0ct 09 2002 09:44 Sep 27, 2005 Jkt 082951 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 S:\WPSHR\GPO\DOCS\82951.TXT JACK PsN: JACKF SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION ONE HUNDRED SEVENTH CONGRESS SECOND SESSION ERNEST F. HOLLINGS, South Carolina, Chairman DANIEL K. INOUYE, Hawaii JOHN MCCAIN, Arizona JOHN D. ROCKEFELLER IV, West Virginia TED STEVENS, Alaska JOHN F. KERRY, Massachusetts CONRAD BURNS, Montana JOHN B. BREAUX, Louisiana TRENT LOTT, Mississippi BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas RON WYDEN, Oregon OLYMPIA J. SNOWE, Maine MAX CLELAND, Georgia SAM BROWNBACK, Kansas BARBARA BOXER, California GORDON SMITH, Oregon JOHN EDWARDS, North Carolina PETER G. FITZGERALD, Illinois JEAN CARNAHAN, Missouri JOHN ENSIGN, Nevada BILL NELSON, Florida GEORGE ALLEN, Virginia KEVIN D. KAYES, Democratic Staff Director MOSES BOYD, Democratic Chief Counsel JEANNE BUMPUS, Republican Staff Director and General Counsel (II) VerDate 0ct 09 2002 09:44 Sep 27, 2005 Jkt 082951 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 S:\WPSHR\GPO\DOCS\82951.TXT JACK PsN: JACKF C O N T E N T S Page Hearing held on February 12, 2002 ....................................................................... 1 Statement of Senator Allen ..................................................................................... 23 Statement of Senator Boxer .................................................................................... 15 Article from the San Jose Mercury News, dated February 10, 2002, entitled, Enron Collapse Strongly Felt in California; From Pensions to Energy Prices, Effect on Government Is Broad ..................................... 16 Statement of Senator Breaux ................................................................................. 9 Statement of Senator Brownback ........................................................................... 20 Statement of Senator Burns ................................................................................... 5 Prepared statement .......................................................................................... 6 Statement of Senator Carnahan ............................................................................. 21 Statement of Senator Cleland ................................................................................. 13 Statement of Senator Dorgan ................................................................................. 2 Statement of Senator Ensign .................................................................................. 22 Statement of Senator Fitzgerald ............................................................................ 3 Statement of Senator Hollings ............................................................................... 1 Article from The New York Times, dated January 13, 2002, entitled, Enron’s Collapse; Complex Web of Relationships in Boom and Bust ....... 44 Statement of Senator Hutchison ............................................................................ 10 Statement of Senator Inouye .................................................................................. 5 Prepared statement .......................................................................................... 5 Statement of Senator Kerry .................................................................................... 7 Statement of Senator Lott ...................................................................................... 25 Statement of Senator McCain ................................................................................. 1 Statement of Senator Nelson .................................................................................. 23 Statement of Senator Smith ................................................................................... 14 Statement of Senator Snowe ................................................................................... 12 Statement of Senator Stevens ................................................................................ 8 Statement of Senator Wyden .................................................................................. 11 WITNESSES Lay, Kenneth L., Former Chairman and CEO, Enron ......................................... 25 Powers, Jr., William C., Member of the Enron Board of Directors and Chairman of the Special Investigation Committee ........................................... 26 Prepared statement and executive summary ................................................. 29 Letter dated February 6, 2002, from William C. Powers, Jr. to Joseph F. Berardino .................................................................................................. 69 (III) VerDate 0ct 09 2002 09:44 Sep 27, 2005 Jkt 082951 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 S:\WPSHR\GPO\DOCS\82951.TXT JACK PsN: JACKF VerDate 0ct 09 2002 09:44 Sep 27, 2005 Jkt 082951 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 S:\WPSHR\GPO\DOCS\82951.TXT JACK PsN: JACKF THE COLLAPSE OF ENRON TUESDAY, FEBRUARY 12, 2002 U.S. SENATE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. The Committee met, pursuant to notice, at 9:30 a.m. in room SR– 253, Russell Senate Office Building, Hon. Ernest F. Hollings, Chairman of the Committee, presiding. OPENING STATEMENT OF HON. ERNEST F. HOLLINGS, U.S. SENATOR FROM SOUTH CAROLINA The CHAIRMAN. The Committee will come to order. For the record, this Committee on Commerce conducted its first Enron hearing on December 18, and shortly after that hearing, Mr. Ken- neth Lay, the Chairman, committed to testifying on Monday, Feb- ruary 4. However, on Sunday night, February 3, Mr. Lay’s attor- neys notified the Committee that Mr. Lay would not appear, and so we canceled that hearing, and the Committee voted unanimously on February 5 to authorize the Chairman of the Committee to issue a subpoena to compel the appearance of Mr. Lay before the Com- merce Committee on February 12. The Committee was notified on Sunday night, February 10, that Mr. Lay would appear before the Committee but would assert his Fifth Amendment right against self-incrimination. We have a vote in about an hour’s time. I know the Members are anxious to make their opening statements, but the request is to please make them as brief as possible, because if we went to all 23 Members it would be about an hour and 40 minutes, and I would like to get through the opening statements and swear the witness prior to that vote. I am going to yield from side to side here. My Ranking Member, Senator McCain. STATEMENT OF HON. JOHN MCCAIN, U.S. SENATOR FROM ARIZONA Senator MCCAIN. Thank you, Senator Hollings, and I will make a very brief statement. In a speech given by Mr. Kenneth Lay on April 6, 1999, at a con- ference sponsored by the Center for Business Ethics entitled, ‘‘Cor- porate Governance: Ethics Across the Board,’’ Mr. Lay described the qualities he demanded in a Board member. I quote: ‘‘It is no accident that we put strength of character first. Like any successful company we must have directors who start with what is right, who do not have hidden agendas, and who strive to make judgments (1) VerDate 0ct 09 2002 09:44 Sep 27, 2005 Jkt 082951 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\WPSHR\GPO\DOCS\82951.TXT JACK PsN: JACKF 2 about what is best for the company, and not about what is best for themselves or some other constituency.’’ He went on to say that, ‘‘Once such a board is in place, what does a CEO—and in particular, this CEO—expect from these principled, wise, and experienced directors? Again, our corporate governance guidelines are simple and straightforward. The responsibility of our board—a responsibility which I expect them to fulfill—is to ensure legal and ethical conduct by the company and by everyone in the company. .’’ As Enron’s Chairman of the Board, and CEO since 1986, Mr. Lay was expected to live up to these principles and ensure that others in his company did the same. According to the Powers report how- ever, senior management at Enron made a mockery of Mr. Lay’s words and turned the principles he described on their head. The Powers report indicates that for years Enron engaged in fi- nancial games, hiding massive debt from its shareholders and mis- representing its economic conditions to the public and to many Enron employees. Yet, after years of business shenanigans, and pointed warnings that Enron was going to ‘‘implode in a wave of accounting scandals,’’ the New York Times has reported that during an online chat with Enron employees, as late as September 2001, Mr. Lay called Enron’s stock, ‘‘an incredible bargain,’’ and said that, ‘‘the third quarter is looking great.’’ Mr. Lay, I regret that you have chosen not to explain to this Committee, to the American public, and to your former employees how you, and others in senior management and on the Board of Enron apparently failed so completely to fulfill your responsibil- ities. Thank you, Mr. Chairman. The CHAIRMAN. Thank you. Senator Dorgan. STATEMENT OF HON.