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Enron executives who dumped stock were heavy donors to Bush
public-i.org

WASHINGTON -- Twenty-four top executives and board members at Enron Corp. contributed nearly $800,000 to national political parties, President Bush, members of Congress, and others overseeing investigations of the company for possible securities fraud, according to a Center for Public Integrity investigation. In addition, Enron made $1.9 million in soft money contributions during the same 1999-2001 period.

The Center examined contributions from 29 top Enron executives and directors named in a shareholders' lawsuit filed against the company last month. Only five of those named in the suit did not make a contribution. The suit alleges that the 29 executives and directors sold $1.1 billion worth of stock while knowing the company was in danger of collapse.

he 29 comprise virtually every board member and senior executive that worked at the company during the past three years, according to the company's annual reports.

An analysis of the trades prepared by the law firm Milberg Weiss Bershad Hynes & Lerach LLP reveals the insider sell-off represented 44.3 percent of the total stock holdings and options held by the executives during a three-year period before Enron's meltdown. Fifteen of the 29 executives unloaded more than half their stock before Enron drastically revised its revenue estimates downward, pushing the stock price into a death spiral.

Enron, at one time the seventh-largest company in America and its largest energy trader, filed for bankruptcy on Dec. 2.

Enron's stock collapsed when the company announced on Nov. 8 that it had overstated its earnings by $600 million from 1997 through 2000. The company had kept financial losses off its balance sheet. Many of those losses were incurred through dealings with private partnerships that were run by Enron executives.

The collapse has angered rank and file employees who were blocked from selling company shares in their own retirement portfolios, even as the price nose-dived from a one-time high of $90 to its current value of less than a dollar.

Enron's rapid descent into bankruptcy is the subject of investigations by the Department of Justice, the Securities and Exchange Commission and the House Energy and Commerce Committee. Senate Democrats said last week they plan to subpoena documents from Enron executives and to examine the company's high-level communications to the Bush administration.

The Senate committee will look into whether executives or board members broke the law, whether accounting rules should be tightened and whether the SEC should have done a better job of spotting trouble at the company. Sen. Joseph I. Lieberman, D-Connecticut, said the committee is on a "search for the truth, not a witch hunt."

Meanwhile, Labor Secretary Elaine Chao said her department has begun an investigation into the company's handling of its retirement plan. Chao noted Enron's employees lost 70 to 90 percent of their retirement assets in part because they were required to keep company stock in their retirement accounts.

Trading influence and energy

The company's clout in Washington and the White House in particular is well known. It has long been tied to President Bush and powerful members of Congress from Texas including Sen. Phil Gramm, whose wife Wendy Gramm is an Enron director, House Majority Whip Tom DeLay and Majority Leader Dick Armey.

Enron was the strongest proponent of deregulation of the electric utility industry and its chairman, Kenneth L. Lay, who apparently played an important role in the development of the Bush energy plan. Its campaign contributions and aggressive lobbying tactics were well known on Capitol Hill, and the company has often gotten its way on crucial legislative votes.

Employees and directors of Enron have given $623,000 to Bush over the course of his political career. That includes $220,700 from the executives and directors named in the suit.

According to a Center for Public Integrity analysis of FEC records, the Bush presidential campaign received $74,200 in contributions made by the two dozen top current and former executives and board members in the 2000 election cycle. (That includes $40,000 from Lay to the "1999 State Victory Fund" set up to benefit the winner of the 2000 Republican presidential primary.)

The executives directed another $110,100 to other political candidates and $97,500 in hard money to party committees. They also gave $135,487 to the Enron Political Action Committee. The balance, $381,910, went to Republican and Democratic party committees in "soft money" contributions, the controversial, unregulated and unlimited donations made to political parties. Overall, they gave $799,197.

Among the executives, Kenneth L. Lay and his wife Linda gave the most money to federal campaigns, totaling $87,850 since January 1999. Half of that money went to George W. Bush's campaign for president. Lay also gave $282,910 in soft money to the Republican National Committee and $25,000 to a leadership committee headed by then-Senator and now Attorney General John Ashcroft.

Lay, a one-time energy policy maker for Richard Nixon, was one of the 214 Bush "Pioneers," supporters who raised at least $100,000 for the candidate. He also chipped in for Bush's Florida recount battle after the 2000 presidential election.

In addition, Lou L. Pai, chairman and CEO of Enron Accelerator, former CEO Jeffrey Skilling and former Enron Vice Chairman Joseph Sutton gave a combined $59,000 in soft money to the Republican National Committee prior to the 2000 election.

The $135,487 given to the Enron political action committee was in turn distributed to both national parties equally and to the president's campaign. The PAC also kicked in $4,999 to Ashcroft's campaign committee for his failed Senate bid in the 2000 election.

Other giving

The support from Enron's top brass extends back beyond the presidential campaign, however. Not included in the above totals is $146,500 Bush received from Enron executives during his two races for Texas governor. Of that amount, Lay was responsible for $122,500.

After the election victory, Lay, Skilling and the corporation itself each contributed the maximum $100,000 to the Bush inaugural festivities.

By far, the biggest contributions made to political activity by Enron were by the corporation itself. Federal election laws outlaw contributions from corporations. But money given to national political parties for "party building" activities is permitted -- and unlimited.

The corporation gave $1,895,964 from 1999 to 2001 in so-called "soft money" contributions, usually to the Democratic and Republican national parties, according to the Center for Responsive Politics. Contributions to the GOP were more than three times those to the Democratic Party. Enron Corporation also gave $25,000 in soft money to Ashcroft's leadership committee.

Money isn't everything

Campaign funding tells only part of the story of Enron's undeniable clout inside the Bush White House and on Capitol Hill.

Once the nation's largest buyer and seller of natural gas, with power plant and pipeline projects that span the globe, Enron has an expansive lobbying operation. It pushes a wide range of legislative and regulatory issues, from utility deregulation to tax breaks, trade and telecommunications.

It did well at recruiting political heavyweights as they left public office. When former Secretary of State James A. Baker III left government service, Enron provided him a job as a consultant.

Lobbying expenses exceeded $2 million last year, and included a stable of lobbyists and consultants such as former Christian Coalition head Ralph Reed, one-time Energy Regulatory Commission Chairwoman Elizabeth "Betsy" Moler, in addition to Marc F. Racicot, the new Republican National Committee chairman and Jack Quinn, former White House counsel to former President Clinton.

Perhaps the company's most effective advocate in Washington was Kenneth Lay himself. He met privately with Vice President Dick Cheney last year when the vice president was leading the National Energy Policy Development Group -- made up of Cheney and various department and agency chiefs -- that drafted the president's national energy policy.

Bush created the task force in January 2001 to gather information and make recommendations about a "production and distribution of energy" strategy. The task force's May 2001 report became the basis for the administration's energy legislative package.

The White House has refused requests from the congressional General Accounting Office for records of Mr. Cheney's energy policy meetings. The GAO was forced to file a civil suit to force the administration to open its records; that suit is still pending.

Enron's lobbying influence extends to Capitol Hill. In 2000 it was able to wrangle an exemption in a bill that could have spelled trouble for the company's questionable accounting practices -- the Commodity Futures Modernization Act.

Since 1989, Enron traded natural gas commodities and had become the world's largest buyer and seller of natural gas. Later the company became a pioneer in other commodities ranging from pulp, paper and plastics to telecommunications transmission capacity and weather derivatives.

Despite its public financial reports to the contrary, the Enron divisions involved in the trading markets and overseas investments consistently lost money. The losses were buried in Enron's profitable trading business and in off-balance-sheet financing measures used to keep huge debt off the corporate books.

The Commodity Futures Modernization Act would have brought Enron's trading operations under greater regulatory scrutiny. Enron lobbied successfully to exempt certain types of derivative trading, in which it was heavily engaged, from provisions of the bill. At the time that lobbying on the bill got underway, Enron's soft money contributions and direct giving to certain members of Congress ignited. The bill was introduced June 8, and by the end of the month, Republican and Democrat national parties had taken in $220,000 in soft-money contributions from Enron's political action committee.

Cashing out

While Enron executives were making hundreds of thousands of dollars in campaign contributions, they were collecting millions on insider stock trades. Lawyers representing Enron shareholders filed a class action suit last month claiming that between Oct. 19, 1998 and Nov. 27, 2001, the 29 current and former company officials traded 17 million shares of Enron stock worth $1.1 billion.

The suit names the 29 executives as well as the company's accounting firm, Arthur Andersen LLP. The company's annual reports for 1998, 1999 and 2000 indicate that the 29 comprise virtually every board member and senior executive that worked at the company during that period.

The suit accuses Enron of perpetrating "one of the most serious securities frauds in history." Lawyers allege the Enron executives were in possession of information that "disintegrated Enron upon disclosure" when they traded their stock during that three-year period.

Among those identified as selling large amounts of stock are Lay, who sold more than $101 million worth, or 27 percent of his holdings. Jeffrey Skilling, who abruptly stepped down as chief executive officer in August 2001, sold 39 percent of his holdings, or $67 million. Like many of the other insiders, Lay and Skilling spread much of their sales out over those three years.

Enron did not return calls for comment, but attorneys for the executives defended their clients at a hearing in federal court last month.

James Coleman, Lay's attorney, said if his client's goal were to cash out, he wouldn't have kept so much of his stock. "They said he sold 24 percent of his holdings. That means he's got 76 percent of a dry hole, and I don't think that would indicate anything," Coleman said, according to a transcript of a Dec. 7 hearing in Houston.

Skilling's attorney said the numbers in the shareholders' suit are not correct and that Skilling left 1.8 million shares unsold and "over $100 million of additional proceeds that, if he were truly looking to dump all his stock on his way out the door, one would have expected him to have done."

Two of the 29 sold their entire stake. Pai sold off $354 million. Rebecca Mark-Jusbasche also sold her entire stake for a total of nearly $80 million. Pai's attorney told a judge that the number of shares in the lawsuit is wrong and that his client sold shares on two occasions: his divorce and when he left the company.

Andrew Fastow, the company's chief financial officer until October 2001, sold off 95 percent of his holdings for more than $30 million. Fastow's attorney said Fastow actually bought 10,000 shares of Enron stock in August and has not sold any shares since November 2000.

Board and audit committee member Wendy Gramm, wife of Sen. Phil Gramm, sold off 84 percent of her holdings for $277,000, but those sales took place back in November of 1998.

As the courts sort out the class action suit against the 29 Enron insiders, the Securities and Exchange Commission has come under increasing pressure from Congress to improve accounting standards to protect American investors. Those demands come after Enron's outside auditors, Arthur Andersen LLP, told a congressional committee that Enron officials may have illegally withheld information about its accounting practices.

But even efforts by the SEC to examine the circumstances surrounding Enron's Chapter 11 filing could run into potential conflicts of interest. SEC Chairman Harvey Pitt -- a well-regarded securities lawyer who was partner in the law firm of Fried, Frank, Harris, Shriver and Jacobson until his appointment as SEC chief by President Bush -- represented Arthur Andersen in recent years.

Pitt said at his confirmation hearing that he would recuse himself from matters involving his old clients on a case by case basis. Christi Harlan, director of Public Affairs for the Securities and Exchange Commission, said agency rules would require the chairman sit out commission votes that involves any of his former clients, including Arthur Andersen.


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Congress, Arthur Andersen, And The $60 Billion Enron Meltdown
commoncause.org

"When a debacle like Enron occurs, the critical question for Congress and for regulators is to ask ... [W]here were the gatekeepers, where were the watchdogs?"

Columbia University law professor John Coffee, Jr.

When it collapsed, the giant Enron Corporation brought down with it the life savings and dreams of tens of thousands of employees and investors: The biggest bankruptcy in U.S. history caused the evaporation of $60 billion of shareholder investment and an estimated $1.3 billion in the retirement accounts of Enron workers. The fall of Enron demonstrates the power of Washington's culture of influence to block federal regulatory agencies from protecting the public.

"Accounting goes to the heart of Enron's failure," the Financial Times noted. In November 2001, when Enron reported that it had overstated its net income dating back to 1997 by $586 million, that admission started the chain of events that led to the corporation's bankruptcy. The SEC's failure to stop the conflict of interest by accounting firms doing consulting work for their auditing clients was an important link in the chain.

Enron was Arthur Andersen's second largest U.S. client, and in 2000 the accounting firm received $52 million for its services to the energy company. Of that total, Andersen earned $25 million for its audit work, and $27 million for tax and other consulting services, according to Enron's filings with the SEC. (When he testified before Congress, Andersen CEO Joseph Berardino said that the $52 million from Enron included $4 million paid to a separate business, Andersen Consulting, now known as Accenture. Berardino contended that $34.2 million of its fees were for audit-related and tax work, and that Andersen received $13.3 million from Enron for other consulting services.)

The income Arthur Andersen earned from non-audit related services posed a potential conflict of interest. The question is whether this led the firm to overlook the bookkeeping irregularities that helped bring the company to bankruptcy and cause a sharp decrease in the value of its stock. "Chairman Pitt, who opposed the proposed

SEC rule and represented the accounting firms, has the appearance of a conflict of interest that will make it more difficult for him to serve as a neutral factfinder. He should recuse himself from inquiries related to Andersen," Common Cause President Scott Harshbarger said.

That question is all the more pressing amid reports of Andersen's destruction of Enron audit documents as federal regulators began their investigation of Enron's books. (Andersen has fired the partner it says was responsible for the records' destruction.)

"The culture of influence hurts every American. When auditors fall down on the job, the shock waves are felt by thousands of shareholders and employees. The accounting industry, Arthur Andersen included, has done all it could to get Congress to take its side and prevent tough scrutiny and regulation. We're now paying the price for the lobbying victories of Andersen and other major accounting firms," Harshbarger said.

Money Muzzles The Watchdog

Two years ago, in a fierce lobbying battle between regulators and the accounting industry, Congress hampered the Securities and Exchange Commission (SEC) from implementing tough regulations to ensure that accounting firms that audit company books also are not selling other services to them.

Embroiled in the struggle over auditor independence, and at a time when the SEC rules were being debated, Andersen, the other Big 5 accounting firms, and the American Institute of Certified Public Accountants (AICPA) gave more than $4.2 million in political contributions to federal candidates and national political parties during 2000, according to a Common Cause analysis of Federal Election Commission (FEC) data. This includes more than $2.3 million from June to December, after the SEC had formally introduced its proposal.

During that same six-month period, these firms and AICPA spent more than $7.2 million on lobbying, according to federal lobbying reports.

From 1991 through June 30, 2001, the Big Five accounting firms and AICPA had given $27.2 million in political contributions, including $5.7 million in soft money donations to the political parties, according to Common Cause.

Accountants' Victory, The Public's Loss?

That stricter SEC rule, if it had been in place, may have given Andersen more incentive to question the information Enron was providing it.

"Enron is a textbook case of why conflict of interest matters," Barbara Roper, director of investor protection for Consumer Federation of America (CFA) said. CFA and Consumers Union both strongly supported efforts to clamp down on conflicts of interest among accounting firms.

Industry critics testifying before Congress about the cause of the Enron demise question whether Andersen was aggressive enough in trying to find the corporation's accounting irregularities. "[T]his is a problem that should have been caught in 1997, in 1998, in 1999 and in 2000," noted Scott Cleland, chief executive officer of The Precursor Group, and a former federal official.

"There are more errors in judgment made when you're subject to serious conflicts of interest," noted Columbia University Law School professor John C. Coffee, Jr. "Rationalizations are much easier, particularly in the very gray world of accounting principles which are seldom black and white and which always give enormous amounts of discretion to the professional gatekeeper."

For Andersen's Houston office, Enron was "a very, very big client," Coffee said, noting that accounting firms increasingly are looking to other consulting services, not auditing, as the way to increase revenues. "[T]heir own professional journals tell them ... that auditing is a ... way to get inside the client and then market the much more lucrative consulting services. So an Enron is really a potential market of $100 million or $200 million to a firm that's auditing it, because they're looking at what the future growth was if Enron had remained solvent, and that does create a serious conflict problem."

Levitt Seeks To Ensure Auditor Independence

It was just this sort of problem that Arthur Levitt, then SEC chairman, sought to target when he formally proposed in June 2000 that an accounting firm that audits a corporation should be prohibited from doing certain consulting work for the firm at the same time. The most hotly contested area of that regulation would have banned accounting firms from designing and implementing financial information systems for their audit clients. The rule also would have prohibited the same accounting firm from overseeing a company's internal audit staff while doing its external audits.

Levitt's proposal caused a firestorm of opposition, particularly from the AICPA, Andersen, KPMG, and Deloitte & Touche accounting firms. Those firms had well-connected talent at their disposal to convince Congress to fight its battle. Representing Arthur Andersen was the lobbying firm Griffin, Johnson, Dover & Stewart, one of whose principals, Patrick Griffin, was for three years President Clinton's assistant for legislative affairs.

Also working for Andersen was Dan Brouillette, a former senior aide and legislative director to Representative Billy Tauzin (R-LA), and David Boies, who represented Al Gore in his recount fight.

Deloitte & Touche hired longtime former Representative Vic Fazio (D-CA). Securities attorney Harvey Pitt, the current SEC chairman, also represented the Big 5 in their battle over auditor independence. (Ernst and Young and PriceWaterhouseCoopers pressed for a compromise regulation with the SEC.)

Congress Intervenes

Congress waded into the battle, with scores of Members writing to the SEC and criticizing the proposed ruling. According to news reports and consumer advocates working on the issue, those raising concerns about the ruling in letters to the SEC included Senators Charles Schumer (D-NY), Robert Bennett (R-UT), Robert Torricelli (D-NJ), Evan Bayh (D-IN), Richard Shelby (R-AL), Rod Grams (R-MN), Michael Crapo (R-ID), Wayne Allard (R-CO), Jim Bunning (R-KY), Chuck Hagel (R-NE), Rick Santorum (R-PA), and Senator Phil Gramm (R-TX), whose wife, Wendy, served on Enron's board.

Twenty-one Republican Members of the House wrote in July to assert that the rulemaking should be delayed until a new Administration could weigh in. Also in July, six Democrats expressed their misgivings that the rule was being rushed through.

But Members weren't content to just write letters. They also held hearings. In late September, Senator Grams summoned Chairman Levitt to defend his proposal. "Moving to government regulation from a form of self-governance, which has served the industry very well for all of its history, is not a move to be made without a full hearing on the consequences of such action," Senator Grams said. "We're worrying about a train wreck and the first bolt hasn't flown out of the train," Senator Mike Enzi (R-WY) added.

Some Members threatened more drastic action. Representative Henry Bonilla (R-TX) pressed for legislation to require that the SEC delay approving any new auditor independence rule until a new Administration took over in 2001. Bonilla's efforts ultimately won the support of 34 Members of the House, including House Majority Leader Dick Armey (R-TX).

Responding to this intense pressure, Levitt sent a letter to key Members of Congress asking them not to intervene in the Commission's rulemaking process by "circumventing, for the first time, a process that has served our markets and this country's investors for more than 65 years."

When the SEC met on November 15 to approve the Levitt proposal, the outcome of the 2000 presidential election remained uncertain, with the accounting industry unsure whether they would face a Gore administration, likely to be amenable to regulation, or a less-regulation-prone Bush presidency. That uncertainty may have led both the industry and the SEC to agree on a compromise regulation. The final rule allowed firms to provide information technology consulting services to their audit clients, provided they disclosed the fees they received for these services, and met certain other criteria. Accounting firms also could continue to do external audits of a company while performing up to 40 percent of a client's internal audit work. Accounting firms with assets under $200 million would be exempt from the 40 percent restriction.

Andersen deemed the SEC's final rule "a significant improvement over the original proposal." But consumer activists were less sanguine. "It's disappointing that the accounting industry appears to have watered down what was originally a very strong and appropriate rule," said Frank Torres, legislative counsel for Consumers Union.

"The Enron disaster vividly demonstrates what's wrong with our current political system where the public interest is trumped by campaign contributions and lobbying," Harshbarger said. "Thousands of Enron employees, retirees, and shareholders who have suffered real harm from the Enron meltdown are proof that influence peddling is not a victimless crime."

Commentary:
Members of Congress assure us MONEY never enters into their decisions. Those who oppose campaign finance reform want government of, by and for the rich. The Enron Scandal proves money is "not" free speech.


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Follow the Money
commoncause.org

Total Soft Money Contributions From Enron Corp* to National Party Committees
January 1, 1991 through June 30, 2001

Party 1991-1992 1993-1994 1995-1996 1997-1998 1999-2000 Jan-June2001 Total
Democrats 28,525 28,500 146,900 179,200 607,565 2,050 $992,740
Republicans 45,134 93,000 541,965 604,750 1,433,850 224,849 $2,943,548
Total $73,659 $121,500 $688,865 $783,950 $2,041,415 $226,899 $3,936,288

* Totals include contributions from affiliated and/or executives

Total PAC Contributions From Enron Corp to Federal Candidates
January 1, 1991 through June 30, 2001

Party 1991-1992 1993-1994 1995-1996 1997-1998 1999-2000 Jan-June 2001 Total
Democrats 57,800 95,715 28,250 64,864 87,089 13,500 $347,218
Republicans 72,750 93,850 143,421 145,029 192,954 18,500 $666,504
Total $130,550 $189,565 $171,671 $209,893 $280,043 $32,000 $1,013,722

Soft Money And PAC Contributions From Arthur Andersen & Co To National Parties And Federal Candidates
January 1, 1991 Through June 30, 2001

    1991-1992 1993-1994 1995-1996 1997-1998 1999-2000 Jan-June 2001 Total
Soft* Democrats 78,300 0 2,000 1,250 25,750 107,300
Republicans 32,826 0 34,258 65,000 236,250 102,121 470,455
  Total $111,126 $0 $36,258 $66,250 $262,000 $102,121 $577,755
 
PAC Democrats 134,823 187,560 203,985 158,119 211,259 93,855 989,601
Republicans 75,050 156,450 276,316 269,467 429,240 130,648 1,337,171
  Total $209,873 $344,010 $480,301 $427,586 $640,499 $224,503 $2,326,772
 
Overall Total $320,999 $344,010 $516,559 $493,836 $902,499 $326,624 $2,904,527

*Soft money totals include contributions from affiliates and/or executives.

Top Recipients of Enron PAC Contributions to Current Members of Congress
January 1, 1991 Through June 30, 2001

Senate Party-State Total
Hutchison R-TX $24,500
Burns R-MT 14,700
Bingaman D-NM 12,874
Gramm R-TX 2,000
Bond R-MO 8,000
Hagel R-NE 7,881
Crapo R-ID 7,689
Ensign R-NV 7,500
Schumer D-NY 7,433
Bennett R-UT 7,053
Breaux D-LA 7,000
Daschle D-SD 6,000
Nelson D-NE 6,000
McCain R-AZ 6,000
Nickles R-OK 6,000
Roberts R-KS 6,000
Thomas R-WY 5,900
Conrad D-ND 5,650
Smith R-OR 5,500
House Party-State Total
Jackson-Lee D-TX $18,500
Bentsen D-TX 16,750
Frost D-TX 14,500
Barton R-TX 13,009
DeLay R-TX 12,400
Stenholm D-TX 9,689
Bereuter R-NE 9,250
Edwards D-TX 8,500
Dingell D-MI 8,000
Johnson R-TX 7,750
Bonilla R-TX 7,250
Dreier R-CA 7,000
Hastert R-IL 6,432
Hall R-TX 6,000
ShawJr R-FL 6,000
Oxley R-OH 5,500
Tauzin R-LA 5,464
Boucher D-VA 5,332
Largent R-OK 5,123
Cubin R-WY 5,000
Thomas R-CA 5,000

Total Soft Money Contributions From Enron To the Ashcroft Victory Committee

Enron Corp# 25,000
Lay, Kenneth L, Chair & CEO# 25,000

PAC Contributions From Enron to John Ashcroft's 2000 Senate Campaign

Enron PAC 4,999
Total 54,999

# Donation Included in previous soft money chart

Total Enron Contributions to the Bush-Cheney Inaugural Committee

Enron Corp 100,000
Lay, Kenneth L, Chair & CEO 100,000
Skilling, Jeffrey, Chair 100,000
Kinder, Richard D, President 100,000
Total $400,000

Commentary:
The conservative has been telling us full disclosure of campaign money is all we need for campaign finance reform. Did these disclosures stop the congress and Bush from being bought? You decide. Read: Accounting for Disaster.


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Texas Accounting
Forbes.com

Dan Ackman, 01.16.02

NEW YORK - At this point, the folks at Enron should be down on their knees thanking the Lord for accountants like Arthur Andersen. Not only do they bless the books on the way in, they take so much of the blame on the way out.

Yesterday, the Big 5 accounting firm fired the point man in its audits of Enron and said he had directed an "expedited effort" to destroy documents even after learning that federal regulators were probing Enron's business practices.

The document destruction didn't stop, Andersen said, until the secretary for David Duncan, the now-fired partner in charge of the Enron job, sent an e-mail to other secretaries directing them to "stop the shredding" on Nov. 9, the day after Andersen received its subpoena from the Securities and Exchange Commission.

Andersen said it disposed of "thousands'' of e-mails and "large numbers'' of paper documents relating to Enron. It also placed three other partners responsible for the Enron work on leave. In a statement, Andersen said the shredding was "on such a scale and of such a nature as to remove any doubt that Andersen's policies and reasonable good judgment were violated."

Berardino

Arthur Andersen managing partner Joseph Berardino has a Texas-sized headache.

While Andersen has captured attention with its repeated bonehead plays, the secrets the auditors were hiding were not Andersen's; they were Enron's. Andersen made millions from its audits, and Enron's top executives profited in the billions, all while causing losses in the tens of billions. At the end of the day, Enron was not auditing Andersen; Andersen was auditing Enron.

Andersen has not described what records it destroyed, and it claimed the shredding was done "without any consultation with others in the firm." It added that it "has successfully recovered documents from electronic backup files and is continuing efforts to retrieve more." Its managing partner Joseph Berardino already testified last month to Congress that Enron withheld critical information and engaged in "possibly illegal acts."

What was Andersen thinking?

While the Enron case is unique in scale and kind, it is part of a trend in the accounting profession, says Wollman Distinguished Professor of Accounting Douglas Carmichael of Baruch College.

While the SEC's position is "unwavering" that audit papers must be preserved in "a complete and unaltered form," there has been a cultural change. First, auditors over the years have come to "feel like victims." When shareholders suffer huge losses or companies go bankrupt, auditors have found themselves defendants in lawsuits. Often they--and their insurance carriers--are the only ones with deep pockets available to pay claims. "This has given them a sense of entitlement that they have to protect themselves," Carmichael says.

Technology has also changed. With computers able to generate new drafts at a keystroke, it is difficult to distinguish formal "work papers" from informal notes, drafts or what accountants call "desk files." There is no standard practice for keeping e-mails, Carmichael says, but, he suggests, "if it costs nothing to preserve [e-mails or other electronic files], there is no reason to delete."

As a result, auditors have tended to "clean up the work papers" and "keep only those necessary to support their opinion," Carmichael says. That practice is "nonsense," because if you discard contrary evidence, the opinion itself is tainted, he points out. And when the auditors do wind up in court, the fact of the destruction is often more damning than the papers themselves.

Andersen, it seems, has put itself in the worst position possible. The lawyers whom it feared can only be looking on now in horror and delight. For example, Melvyn Weiss, one of the most distinguished securities plaintiffs lawyers in the country, says he does not know what documents Andersen shredded but suggests it may have acted to get rid of documents that Enron itself destroyed. That way, when investigators seek documents from Enron, its executives or partnerships, "the auditors don't have them either." Weiss' firm is one of many suing Enron, its executives and affiliates.

Andersen is in trouble because of its shredding. But its problems started years before when it approved the creation of not one or two private partnerships but thousands of them. Even if all these partnerships were "legal" in the sense that they had enough minority ownership that they were not technically part of Enron, they created a distorted picture of Enron's true indebtedness.

Worse, Andersen blessed a practice known as "gross accounting" that had the world believing that Enron, a once obscure pipeline company morphed into an energy trader, was by revenue the seventh largest company in the U.S., in a league with General Electric and IBM.

The idea of accounting is that a dollar here is comparable to a dollar there. Even if Enron and Andersen took care to adhere to the technical rules--and there is reason to believe they often did not--they violated a cardinal principle. When an accountant is painting a picture of a kangaroo, it should look like a kangaroo, not an elephant.

In its audits of Enron, Andersen seems to have abandoned representational drawing for abstract impressionism or surrealism. Jackson Pollock may have been a great artist, but you don't want him painting your living room. Salvador Dali may have been a genius, but you don't want him painting your house.


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Other Links:

SEC v Andrew Fastow
U.S. SECURITIES AND EXCHANGE COMMISSION
SUBPOENA ENFORCMENT ACTION
AGAINST ANDREW S. FASTOW

sec.org

The Securities and Exchange Commission today announced that on December 12, 2001, it filed a subpoena enforcement action in U.S. District Court for the District of Columbia against Andrew S. Fastow, the former Chief Financial Office, of Enron Corp. Pursuant to a subpoena issued on October 31, 2001, Mr. Fastow was obligated to appear for testimony before the Commission staff at 9:30 a.m. on December 12, 2001. Mr. Fastow, instead, chose not to appear, and instead informed the Commission staff, through counsel, that he would not appear as required by the subpoena. Accordingly, the Commission filed its Application For An Order To Show Cause And For An Order Requiring Obedience To Subpoena, along with a supporting Memorandum and Declaration.

In its Application and supporting filings, the Commission alleges that on October 30, 2001, the Commission issued its Order Directing Private Investigation and Designating Officers to Take Testimony ("Formal Order") in this investigation. The Formal Order authorizes the staff to conduct an investigation into whether, among other things, Enron or certain persons and entities associated with Enron misstated or caused the misstatement of the financial condition and results of operations of Enron and disclosures related thereto, and whether such persons and entities violated the anti-fraud provisions of the federal securities laws in connection with the purchase or sale of Enron's securities. According to the Commission, as the former CFO of Enron, and a central figure in Enron's business affairs and its related party transactions with certain limited partnerships, Mr. Fastow is relevant to matters under investigation, and his testimony may provide evidence as to whether he or others violated the federal securities laws.

In its Application, the Commission alleges that on October 31, 2001, the Commission staff issued and served a subpoena to Mr. Fastow requiring him to produce certain documents by November 7, and to appear for testimony on November 14, 2001. On November 7, Mr. Fastow produced certain documents that he previously had given to the Enron Special Committee. Since then he has not produced any other documents requested by the subpoena. Moreover, in a series of meetings and telephone calls in the two weeks following issuance of the subpoena, Mr. Fastow's attorneys requested a postponement of Mr. Fastow's testimony. The Commission staff granted this request, and on November 18, counsel for Mr. Fastow agreed that he would appear for testimony on December 12 and 13. Thereafter, Mr. Fastow's counsel sought a further postponement of Mr. Fastow's testimony scheduled for December 12, so that he could provide an interview on the 12th to a federal criminal authority. The Commission staff granted this further postponement, with the understanding that the Commission staff would participate in this interview in lieu of Mr. Fastow's testimony obligation set for the same date and that his testimony before the Commission would be required on the 12th should the interview not take place. On December 6, the federal criminal authority cancelled Mr. Fastow's interview, and the following day, the Commission staff reminded Mr. Fastow's counsel that cancellation of the interview did not relieve Mr. Fastow of his obligation to appear for testimony on December 12. In fact, Mr. Fastow did not appear for testimony as required on the 12th.

Pursuant to its Application, the Commission is seeking an Order directing Mr. Fastow to show cause why the Court should not enter an Order requiring his appearance for testimony, and an Order requiring Mr. Fastow to comply fully with the subpoena for testimony and documents.

Commentary:
So we learn here the SEC began its investigation on October 30, 2001 into Enron's financial dealings. Where was the press again? Oh yeah, playing footsie with Bush and his fake war on terrorism.


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Lay Supported Bush--Not Richards
HoustonChronicle.com
chron.com

President has said that he inherited energy exec's backing from Richards

By R.G. RATCLIFFE and BENNETT ROTH
Copyright 2002 Houston Chronicle

Enron chief Ken Lay's own words and campaign contributions undercut President Bush's assertion this week that he merely inherited the energy executive's support from former Democratic Gov. Ann Richards.

Bush, seeking to distance himself from the troubled Houston energy company, said earlier this week that Lay had supported Richards against Bush in the 1994 gubernatorial race.

But in a television interview last year, Lay made it clear that he backed Bush in that race despite his past association with Richards.

"When Governor Bush, now President Bush, decided to run for the governor's spot, (there was) a little difficult situation," Lay told the PBS news show Frontline on March 27, 2001.

"I'd worked very closely with Ann Richards also, the four years she was governor," Lay said.

"But I was very close to George W. and had a lot of respect for him, had watched him over the years, particularly with reference to dealing with his father when his father was in the White House and some of the things he did to work for his father, and so (I) did support him," Lay said.

Bush's personal and political ties to Lay and Enron have become a source of controversy because of the company's sudden collapse into bankruptcy. Lay and Enron have been Bush's top political donors in recent years.

When asked about his ties to Lay on Thursday, Bush suggested that he only inherited Lay as a political supporter.

"He was a supporter of Ann Richards in my run in 1994," Bush said. "And she did name him the head of the Governor's Business Council, and I decided to leave him in place just for the sake of continuity. And that's when I first got to know Ken and worked with Ken, and he supported my candidacy."

But Texans for Public Justice, an Austin-based campaign finance reform organization, said Lay and Enron financially favored Bush in the 1994 race and said Bush had "revised history."

The group said Richards received $12,500 from Enron sources during the 1994 election cycle. But contributions from Enron's political committee and executives totaled $146,500 for Bush, including $47,500 directly from Lay and his wife, Linda.

"President Bush's explanation of his relationship to Enron is at best a half truth," said Craig McDonald, the group's director.

The White House, however, stood by the president's assertion that Lay supported Richards.

"Mister Lay was a supporter of Ann Richards during the 1994 races. The public campaign records clearly reflect his support. Any other suggestion is revising history," Bush spokesman Scott McClellan said Friday.

As evidence, McClellan cited the dates of the campaign filing reports showing that Lay gave Richards a $10,000 contribution in October 1994, shortly before the November election. He also gave her a $2,500 contribution in July of that year.

However, the reports also show that Ken and Linda Lay gave Bush a $25,000 contribution in January 1994. But McClellan said that was during the primary season. However, Bush faced no primary opponent that year. Linda Lay also gave Bush a $12,500 contribution during the general election in October.

According to the Center for Public Integrity, Enron and Lay have donated more than $550,000 to Bush since 1993, making the company his top career patron.

Lay also was an instrumental financial supporter of Bush's father, former President George Bush.

Lay was co-chairman of a 1990 host committee that was set up for then-President Bush's economic summit in Houston. Lay also was tapped to head the local host committee for the 1992 Republican National Convention in Houston.

Over the years the younger Bush and Lay have corresponded regularly about a variety of topics from energy issues to birthdays and knee injuries, according to a report last year in the Los Angeles Times. The paper also said that Bush flew on Enron corporate jets during the presidential campaign.

Last year, Lay was instrumental in persuading Bush to name former Texan Pat Wood to head the Federal Energy Regulatory Commission, which oversees energy deregulation. And Lay met six times with Vice President Dick Cheney and his staff to help craft a national energy policy.

However, since the Enron debacle, Bush has refused to defend Lay. This week he endorsed a Justice Department investigation of the troubled company.

Lay and his wife also did not join other prominent Houstonians who attended a White House Christmas Party last month. White House spokeswoman Anne Womack said the Lays were invited but sent their regrets.

However, sources have told the Chronicle that the Lays were encouraged not to attend the high-profile party.

In recent days, Bush and his aides have made a concerted effort to tie Lay and Enron to Democrats such as Richards.

Richards' former chief of staff, John Fainter, said Thursday that she had named Lay to head her business council knowing he likely would support Bush in the governor's race.

"I don't see how in the world he could say he inherited Mr. Lay from Governor Richards," Fainter said.


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sec.gov
Commissioners terms
SEC chief's ties to Andersen complicate probe
HoustonChronicle.com
chron.com

By KEVIN DRAWBAUGH
Reuters News Service

WASHINGTON - America's top markets cop is being hobbled in leading the Securities and Exchange Commission's probe of Enron Corp. by his links to the accounting firm entangled in the deepening scandal over the company's collapse, experts said today.

SEC Chairman Harvey Pitt represented the accounting firm Andersen, now under SEC investigation for its auditing of Enron's books, when he was a private attorney.

Pitt has had to step carefully in the Enron probe, sources said. Congressional aides said it was understood on Capitol Hill that he did not testify last month at a congressional committee hearing on Enron because of his ties to Andersen.

Edward Fleischman, a former SEC commissioner, told Reuters: "Harvey, I think, represented each and all of the Big Five auditing firms. That could very well be a reason that he feels it would be inappropriate" to take part in such a hearing.

The SEC refused to detail Pitt's role in the probe, citing a policy of not commenting on such issues. "Chairman Pitt is following the terms of his ethics agreement that was provided to Congress and the government ethics office when he took office," SEC spokesperson Christi Harlan told Reuters.

Pitt, who took over at the SEC in August, worked for Andersen and other accounting firms in battles with the SEC over auditor independence rules.

Andersen was just one of many clients over 20 years that helped him win a reputation as the nation's best securities lawyer, making it virtually certain he would face potential conflicts. "From the day his nomination was announced, people understood that this was going to happen. So it's not a surprise," said Donald Langevoort, a securities law professor at Georgetown University in Washington, D.C.

Last summer, as the Senate was considering his nomination as SEC chairman, Pitt pledged to distance himself for one year from SEC matters involving former clients.

Comment: A pledge by Pitt to distance himself for one year is not enough. He should remove himself from all decisions regarding former clients for the rest of his term.

Shortly after his appointment, the Enron affair erupted and Pitt's former client Andersen quickly became involved.

Enron slid in just weeks from Wall Street stardom to making the largest bankruptcy filing in U.S. history on Dec. 2. Its downfall threw thousands out of work and hammered investors.

Questions arose about Enron's accounting practices, financial disclosures and other matters. The Justice Department said this week it was pursuing a criminal probe of Enron. The Labor Department and five congressional committees are also investigating the company, along with the SEC.

Andersen admitted on Thursday its employees had destroyed an unspecified number of documents related to those audits.

SEC probes are carried out by enforcement staff. Commission members, including the chairman, become involved twice -- once to vote on launching a formal investigation, and again at the probe's end on any staff request for enforcement action.

The commission voted in October to authorize a formal probe of Enron. Pitt would normally have had to recuse himself from the vote, but sources said due to a shortage of commissioners, he did vote. He was allowed to do so under a government ethics rules loophole that waives recusal requirements under some circumstances with full disclosure.

The SEC has suffered from a shortage of commissioners for some time. Four of its five seats are technically vacant, but one commissioner has stayed on past her terms' expiration to help and two have been nominated by President Bush.

According to the sec.gov website a commissioner is appointed once a year for a five year term. The last commissioner was approved by the senate in 1997, while the only other member was approved in 1996. The Republican Senate failed to give concent to commissioners in 1998, 1999, 2000. The Chairman, Mr. Pitt was approved in August of 2001 only after democrats regained control of the Senate, but the confirmation was still months behind schedule because republicans controlled the senate for the first six months of the year.

Sources said Pitt was advised in October to distance himself from further aspects of the probe, although some said that could be difficult as the case gets more attention.

Commission members will probably not be faced with another formal vote on the Enron investigation for several months. By that time, when staff asks the commission to vote on an enforcement action, Pitt will have more options, sources said.

He will either be able to recuse himself because more commissioners will be aboard. Or, if the vote takes place after August, his one-year recusal period will have expired.

In the meantime, however, the SEC may suffer by being deprived of Pitt's expertise in handling the biggest case it has encountered since he became chairman.

"He's a very gifted and thoughtful chairman and you want his expertise any time you can get it," said Joel Seligman, dean of Washington University School of Law.


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