February 8, 2002

House Panel Challenges Skilling; Ex-CFO Fastow Takes the Fifth

WASHINGTON -- Riding a wave of popular revulsion over Enron Corp.'s collapse, members of Congress vilified the senior executives whose elaborate accounting schemes built up and ultimately brought down one of America's largest companies, portraying them as symbols of arrogance, immorality and excess.

Highlighting a daylong hearing were a series of heated confrontations between increasingly incredulous House members and former Enron Chief Executive Jeffrey Skilling, who steadfastly denied knowledge of improper activities by his subordinates and of many of the details of the conflict-ridden partnerships that brought the company down.

"On the day I left, I absolutely and unequivocally thought the company was in good shape," Mr. Skilling told the House Energy and Commerce Committee's investigative subcommittee, recalling his abrupt August 2001 departure.

Rep. Ed Markey (D., Mass.) said Mr. Skilling's responses reminded him of the bumbling Sgt. Schultz on "Hogan's Heroes": "I know nothing. I see nothing."

Hours earlier, Enron's former treasurer, Jeffrey McMahon, testified that he provided explicit warnings about the partnerships to Mr. Skilling at a March 2000 meeting. But Mr. Skilling insisted, "I recall a meeting with Mr. McMahon, but I don't recall him saying that." Mr. Skilling only recalled discussing Mr. McMahon's concerns about his own compensation.

"I have a hard time believing that," Rep. Cliff Stearns, a Florida Republican, responded.

The hearing yielded new details about the extent to which top Enron executives had been warned about the dangers of off-books partnerships that disguised company debt and enriched certain top officials.

All told, the events of the day heralded something larger: the emergence of Enron as a symbol of business extravagance and a cudgel for those pushing new regulation of corporate finance, pensions and accounting. The climax of weeks of revelations about the company's practices under the glare of scrutiny by the Justice Department, the Securities and Exchange Commission and a dozen congressional committees, an atmosphere of history and histrionics prevailed.

"What we have before us is a story of simple, old-fashioned theft -- and the inexplicable acts, or lack thereof, that allowed the crooks to get away and to destroy a company," said Committee Chairman Billy Tauzin, a Louisiana Republican.

The Rev. Jesse Jackson, the civil-rights leader, attended the hearing surrounded by a group of low-level Enron employees demanding pension and 401(k) reforms, as well as punishment of top executives who engaged in improper activities.

Mr. Skilling's appearance followed witness panels that the committee's leaders split, in the spirit of a morality play, into purported good guys and bad guys.

First came a dramatic series of appearances by former Enron executives refusing to testify by citing their constitutional right to avoid potentially self-incriminating statements. Andrew Fastow, the boyish-looking former chief financial officer, drew the most attention, having earned $30 million on supposedly independent partnerships that he set up to do business with Enron. Cameras clicked incessantly as subcommittee Chairman Jim Greenwood, a Pennsylvania Republican, swore in the witness and asked a decidedly leading question.

"You enriched yourself by tens of millions of dollars," the chairman said. "How could you believe that your actions were in any way consistent with your fiduciary duties to Enron and its shareholders, or with common-sense notions of corporate ethics and propriety?"

Mr. Fastow replied: "I would like to answer the committee's questions, but on the advice of counsel I respectfully decline."

His fellow former executive at the center of the partnerships, Michael Kopper, also refused to testify, as did two current Enron executives, Richard Buy and Richard Causey, who had been given oversight responsibilities over the officer-led partnerships, alongside Mr. Skilling, by Enron's board.

The committee portrayed the next panel of witnesses as good guys -- Enron executives who tried to do something about problems they saw. Enron attorney Jordan Mintz testified that he had been concerned about potential conflicts of interest in the partnerships since his arrival at the company in October 2000.

But he said Messrs. Buy and Causey urged him not to press the issue, telling him that Mr. Skilling "is very fond of Andy," thereby signaling that Mr. Skilling would be reluctant to rein in Mr. Fastow's deals.

Mr. Mintz also described efforts by two Fastow subordinates to get a lawyer in his division fired after the attorney had taken a hard line in negotiating with Mr. Fastow's partnerships. He said he was told that Mr. Fastow had left the young attorney an expletive-laced voice mail complaining about his negotiation stance. Mr. Mintz testified that Clifford Baxter, the former Enron vice chairman who killed himself last month, had told him that "he didn't understand why the board was allowing Andy to do this."

Filling out the panel was Mr. McMahon, currently Enron's chief operating officer. He testified that he was transferred to a new job in the company after complaining to Mr. Skilling in March 2000 about the structure of the partnerships.

He gave the committee handwritten, contemporaneous notes of discussion points he prepared for that meeting; they said that he warned Mr. Skilling that one of the main partnerships was ridden by conflict. Mr. McMahon said he told Mr. Skilling that he was in an untenable position, because he was negotiating on Enron's behalf with the company's chief financial officer, Mr. Fastow, who was Mr. McMahon's superior and simultaneously representing the LJM partnership. "I find myself negotiating with Andy on Enron matters and am pressured to do a deal that I do not believe is in the best interests of shareholders," his notes said. Mr. McMahon said he also raised concerns that Mr. Fastow was pressuring investment banks that did business with Enron to invest in another partnership, LJM2.

The chairman and ranking member of the committee highlighted other conflict-laden activities at Enron, including what they called a "sweetheart deal" signed by two soon-to-be-married Enron employees representing different parties to a transaction. The two, Trushar Patel and Anne Yaeger, didn't profit from the deal, though Ms. Yaeger would later be paid a $500,000 bonus for work she did for other partnerships. "These were junior people who were not negotiating any material term of the deals they were involved in. They were carrying out the orders of their superiors," said their lawyer, Bruce Baird.

Enron's Washington attorney, Robert Bennett, who sat in the audience throughout the hearing, exhibited concern that the entire company had become a whipping boy for corporate misbehavior.

"Many of the statements today were extremely strong," he said during a break, noting that the witnesses he thought came off best -- Messrs. McMahon and Mintz -- are still employed by Enron and have been promoted. "I only hope that this committee will give the new Enron the chance to survive."

Mr. Skilling, who was at the helm during much of the company's march to becoming the seventh-largest corporation in America, received credit for insisting upon telling his side of the story publicly without a grant of immunity, but for little else.

A self-described hands-on manager, Mr. Skilling testified he had no knowledge that the partnerships were allegedly used by his longtime colleague and protege, Mr. Fastow, to conceal debt or inflate profits. "It was my understanding that the purpose of the transactions was to provide a real hedge," he said, referring to a legitimate financial strategy to protect profits the company had earned from other investments. He suggested several times that his oversight was discretionary, shifting responsibility to Mr. Causey, the chief accounting officer, and Mr. Buy, the chief risk officer.

Mr. Skilling was pummeled with questions about what he knew about the partnerships, how he could have been misled and why he didn't heed warnings or put his signature on partnership paperwork, as repeatedly requested by company attorneys. Mr. Skilling said he didn't believe his signature was required, and didn't recall receiving memos warning of dangers that he didn't sign. He attributed the company's collapse to a loss of confidence in the marketplace that created a liquidity crisis: "Enron's failure was due to a classic run on the bank."

Of the potential conflicts created by the partnership, Mr. Skilling said: "I believed at that time that there were adequate controls in place."

Mr. Skilling -- known for a laserlike mind -- provided often-vague descriptions of meetings at which important company decisions were made, and about his duties as chief executive. At one point, he said that he hadn't fretted over the potential conflicts of interest posed by having company employees running multimillion-dollar ventures that did business with Enron: "I'm not the person who determines if there's a conflict. We have lawyers ... ."

Members homed in on whether Mr. Skilling had received warnings about the partnerships from the man he said was his best friend, the late Mr. Baxter. Enron executive Sherron Watkins told former CEO Kenneth Lay in a letter in August that Mr. Baxter had warned Mr. Skilling and others about the Fastow partnerships.

Mr. Skilling looked pained and his voice became almost inaudible as he described conversations in which he said Mr. Baxter criticized Mr. Fastow and warned Mr. Skilling against relying on Mr. Fastow.

But Mr. Skilling denied being warned about the impropriety of the partnerships. Mr. Skilling said that when he asked Mr. Baxter whether anything was wrong with the partnership structure, Mr. Baxter said: "I don't know what it is."

Mr. Skilling said when he asked whether there was anything "bad" about it, Mr. Baxter replied, "no," but added that "it looks bad" to have the chief financial officer of Enron a party to the partnerships.

Mr. Skilling said, however, that he didn't act on Mr. Baxter's statements because he considered them colored by the animus between the two men. Mr. Skilling said he talked to Mr. Baxter about a week and half before he died.

Distraught by the company's decline and the resulting damage to his reputation, Mr. Baxter "was heartbroken," Mr. Skilling said.

Write to Tom Hamburger at tom.hamburger@wsj.com² and Greg Hitt at greg.hitt@wsj.com³

Updated February 8, 2002 8:24 a.m. EST