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Auditor Admits Destroying Enron DocumentsThe New York Times by K. Eichenwald, F. Norris January 12, 2002
As the fortunes of the Enron Corporation unraveled in late 2001, officials of its accounting firm, Arthur Andersen & Company, destroyed "a significant but undetermined number" of documents relating to the company and its finances, Andersen disclosed yesterday.
The document destruction began in September, a government investigator said, and continued into November, after Enron announced that the Securities and Exchange Commission was conducting a formal investigation of Enron's finances.
In November, the S.E.C. subpoenaed Andersen for records related to Enron, and the accounting firm told its employees that such documents should be preserved. But Andersen said documents may have been destroyed even after that.
"At this time, we cannot say whether that instruction was violated," said David W. Tabolt, a spokesman for Andersen.
The documents including correspondence and both electronic and paper records were destroyed by employees involved with the Enron assignment, Andersen said. The 89- year-old firm, the smallest of accounting's Big Five, said it had notified the S.E.C., the Justice Department and members of Congress investigating the Enron case of the records' disposal.
The S.E.C. said that it would expand its investigation of Enron's collapse to include Andersen's newly disclosed conduct.
"Destruction of documents is obviously an extremely serious matter," said Steven Cutler, the director of enforcement for the S.E.C. "The destruction of documents by Arthur Andersen will not deter us from pursuit of our investigation and will be included within the scope of our investigation."
Representative Billy Tauzin, Republican of Louisiana and chairman of the House Energy and Commerce Committee, which has been investigating Enron's collapse, said that the destruction could merit criminal charges if it was done to obstruct inquiries into the matter.
"Anyone who destroyed records simply out of stupidity should be fired," Mr. Tauzin said. "Anyone who destroyed records intentionally to subvert our investigation should be prosecuted."
Concerns about Andersen's handling of Enron documents have been growing for several days, according to a Congressional staff member. In December, the Energy and Commerce Committee subpoenaed Andersen for certain records, but did not receive all the materials it expected. On Wednesday, investigators for the committee went to Andersen's Houston office in search of the missing records; many of those turn out to have been among the documents that were destroyed.
Committee staff members are planning to interview Andersen officials in Houston next week, in part to determine what led to the document destruction, according to Ken Johnson, an aide to Mr. Tauzin. Officials of the Justice Department, which has formed a special task force to investigate the Enron debacle, declined to comment on Andersen's disclosure.
Mr. Tabolt of Andersen said that the firm was still gathering information about the episode before deciding what if any discipline to administer to the employees involved.
The electronic records that were destroyed appear to have numbered in the thousands, according to a government official who has been briefed on the matter. Some of those records have been recovered, Andersen said. There has been no accounting yet of the volume of paper documents that were destroyed. Andersen gave no explanation for the records' destruction, but announced yesterday that it was suspending its records management policy, which allowed for periodic disposal of records after certain periods of time. It did not say, however, whether the destruction of the Enron documents had been in compliance with its policy.
The firm also said that it had asked former Senator John Danforth, now a partner with the law firm of Bryan Cave, to review its policy for managing records and recommend improvements. An employee at Bryan Cave said that Mr. Danforth was out of the country and unavailable.
James M. Cole, a partner at the firm's Washington office, will join Mr. Danforth in the review, according to Daniel Schwartz, head of the firm's corporate compliance client service group. Mr. Cole is the former deputy chief of the public integrity section of the Justice Department and served as a special counsel to the House Ethics Committee in its investigation of Newt Gingrich.
Mr. Schwartz said that his firm had been approached by Andersen over the last few days and asked to review its document management system. Mr. Schwartz said he did not know if Andersen meant to imply that the destruction of Enron documents was a result of that system.
On Oct. 16, Enron announced a $618 million third-quarter loss, and questions began to arise about certain limited partnerships related to the company that were used to purchase Enron assets. Within a day, the company was facing a shareholder lawsuit, and shortly thereafter, Enron received an informal request for information from the S.E.C.'s Fort Worth office. The case was then moved to Washington, and the S.E.C. issued a formal order of investigation at the end of October.
Andersen has audited Enron since the company was formed by a merger in the 1980's, and many former Andersen auditors have gone on to work for Enron. They include Richard A. Causey, Enron's chief accounting officer, and Jeffrey McMahon, who became the company's chief financial officer in October after his predecessor was forced out.
On Nov. 8, Enron restated five years of earnings, saying it improperly booked half a billion dollars of profits. Joseph F. Berardino, Andersen's chief executive, testified before Congress last month that Enron engaged in "possibly illegal acts" by withholding information from its auditors related to its earnings. Mr. Berardino also conceded that errors by Andersen had contributed to erroneous financial reporting by Enron. There were no investigations of Enron going on in September, when, Mr. Johnson said, the destruction of documents began, although the share price had fallen sharply from its peak of $90.75 reached in 2000. The shares rallied in early October and were at $33.84 on Oct. 16.
But a disclosure made by Kenneth L. Lay, Enron's chairman and chief executive, about a $1.2 billion reduction of shareholder equity began to bother investors within days. That reduction related to Enron's transactions with partnerships run by Andrew Fastow, then the company's chief financial officer. As investors clamored for more information about those transactions, Mr. Lay first defended Mr. Fastow and then announced he was being replaced.
Andersen has declined to say just what role it played in setting up either the Fastow partnerships or other off-balance-sheet Enron transactions that appear to have been used to make Enron's financial statements seem better than they were. But it did approve the accounting for all those partnerships.
Andersen has also encountered problems in the last year over two other highly publicized audits: The S.E.C. filed a civil fraud complaint against an Andersen partner who certified statements at Sunbeam, the bankrupt appliance maker, showing what turned out to be inflated profits, and the firm was named by the S.E.C. in the Waste Management case, which led to the first fraud settlement by a major accounting firm in decades.
Are Enrons Auditors Hiding Something?The New York Times by Floyd Norris January 12, 2002
Why would the auditors destroy documents?
That is the major question raised by the startling disclosure yesterday that auditors from Arthur Andersen began destroying Enron documents and purging computer files in September and continued doing so while Enron collapsed.
It is not even clear, Andersen says, whether the destruction of documents stopped after the Securities and Exchange Commission issued Andersen a subpoena.
Andersen's role at Enron was far greater than just an auditor. Many of Enron's financial officials, including Richard A. Causey, the chief accounting officer, had come to Enron after working on Enron audits for Andersen. Andersen has refused to say just how involved its accountants were in setting up the off-balance-sheet partnerships that let Enron hide losses, but the auditors knew of the partnerships and signed off on the accounting for them.
Then, as Enron unraveled, the auditors acted as if they had something to hide.
Since Enron collapsed, Joseph F. Berardino, Andersen's chief executive, has tried to insulate Andersen from the storm. He said Enron officials had concealed information from his auditors that had the auditors only known would have kept Enron from hiding some losses.
He also persuaded the heads of the four other major accounting firms to join him in asking the S.E.C. to order companies to make more disclosures about the areas that Enron seems to have abused. The message was clear: It was not our fault. We enforced the rules and were lied to. If you don't like the result, change the rules.
Andersen will not say whether, as Mr. Berardino was telling Congress that story, he knew about the document destruction. Investigators say it started in September before the public knew anything was wrong at Enron and continued into November, after the S.E.C. began its investigation and everyone knew Enron was in trouble.
It is the later actions that may get Andersen employees into trouble, especially if it can be proved they kept killing computer files after the subpoena arrived. But the early deletions may be the most interesting. They could indicate that Enron's accounting had become controversial within Andersen and had started an internal fight.
In any case, the destruction was not complete. Some files that were deleted have been recovered. Investigators will no doubt pay special attention to those files.
Just how much Andersen knew about what was going on at Enron is not clear. It is known that Andersen told Enron that it had wrongly booked millions of dollars in profits but signed off on the statements with the rationale that the amounts involved were not very significant. Now the disclosure of the document destruction raises the possibility that some Andersen auditors knew more than they wanted investigators to realize they knew.
Last year, in what was until now the most humiliating incident in Andersen's history, it settled an S.E.C. complaint saying that senior Andersen auditors had discovered, and then concealed, fraud at Waste Management.
"Unless the auditor stands up to management" as soon as it discovers incorrect accounting, the commission said then, "the auditor ultimately will find itself in an untenable position: it either must continue issuing unqualified audit reports on materially misstated financial statements and hope that its conduct will not be discovered, or it must force a restatement or qualify its report and thereby subject itself to the liability that likely will result from the exposure" of what it had already done.
Is that what happened here? If it turns out that is the case, then Andersen, once the most respected accounting firm in the world, may not survive the Enron debacle.
A Familiar Capital ScriptThe New York Times by Don Van Natta Jr. January 12, 2002
WASHINGTON, Jan. 10 The rapidly exploding Enron inquiry presents elements reminiscent of earlier Washington scandals, including carefully phrased denials and accusations of easy access. And in a matter of hours today, it sent the White House into a full- scale effort to contain the potential damage to President Bush at a time when he wants to focus on the war on terrorism and the flagging economy.
The White House spent much of the day trying to distance the president from a torrent of bad news about the fall of Enron, the Houston energy conglomerate.
Although no one has suggested that Mr. Bush has done anything wrong, the connections between his presidency and Enron are uncomfortably close. The company's chairman, Kenneth L. Lay, has been a close friend of Mr. Bush for many years, and Mr. Lay and other Enron executives have contributed more money to Mr. Bush over his political career than anyone else, an amount exceeding $550,000. Mr. Lay contributed an additional $100,000 for the Bush inaugural committee.
Those connections were made vividly clear today when the White House disclosed that Mr. Lay discussed his company's precarious financial condition last fall with Treasury Secretary Paul H. O'Neill and sought assistance from Mr. Bush's best friend and presidential campaign chairman, Commerce Secretary Donald L. Evans.
Throughout the day, White House officials denied that Mr. Bush had been aware of the company's troublesome finances or had ever been asked to come to its rescue.
But on Capitol Hill, Democrats were already beginning to ask of the president, "What did he know and when did he know it?" And questions were being raised about whether a criminal inquiry into Enron's collapse should be led by a special counsel rather than by the Justice Department, because Attorney General John Ashcroft received $57,499 in campaign contributions from Enron and Mr. Lay, according to the Center for Responsive Politics.
Mr. Ashcroft, as well as his chief of staff, recused themselves from the criminal investigation, which will try to determine whether the company or its executives committed fraud before it went bankrupt. But critics still questioned whether the Justice Department, which includes many other political appointees, could independently investigate the company.
Just as Enron's collapse was stunning because it occurred so quickly and so completely, the latest disclosures have reawakened Washington's scandal machinery, which had been practically dormant since Sept. 11. The capital may once again face months, if not years, of yet another investigation of the White House featuring the volatile mix of money, influence, access and politics.
Elements of a classic political scandal are here: A Texas corporation, led by Mr. Bush's most generous campaign contributor, files the largest bankruptcy petition in American history. A handful of executives are able to sell $1 billion worth of the company's stock before its collapse, but thousands of employees are barred from selling, losing their life's savings and retirement accounts.
And just this week, the White House disclosed that Enron executives, and the company chairman, had meetings and discussions with cabinet members, White House officials and Vice President Dick Cheney before and during the corporation's implosion.
On top of everything else, the accounting firm that audited Enron's books, Arthur Andersen LLP, disclosed today that a "significant but undetermined" number of documents related to the company had been destroyed.
"This is the perfect storm," said Philip M. Schiliro, the chief of staff for Representative Henry A. Waxman, Democrat of California. "It's the biggest bankruptcy in American corporate history, a bankruptcy where a small number of executives enriched themselves to the tune of hundreds of millions of dollars while thousands of employees were left with worthless stock. And in 2001, Enron is the most influential company in Washington. When you piece it all together, there are many questions that need to be answered."
President Bush said today that he had never discussed Enron's financial woes with Mr. Lay, who has supported Mr. Bush politically since his unsuccessful campaign for Congress in 1978. Mr. Bush said he last saw Mr. Lay in Texas at an April 30 fund-raiser for the literacy foundation of the former first lady Barbara Bush. At the time, Enron's price per share was nearly $60; its closing price today was 67 cents.
On Capitol Hill, Republicans and Democrats alike have pledged to work together to get to the bottom of the matter. Some Democratic officials also expressed glee that questions about White House influence peddling seemed to be emerging as a major political story of 2002.
"If their goal was to give this story a head of steam, they have succeeded," Jennifer Palmieri, the press secretary of the Democratic National Committee, said of the White House's handling of the Enron matter. "I think they are very spooked by this."
Five Congressional committees have sent out subpoenas on the matter. The first of many hearings expected this year is set for Jan. 24 by the Senate Governmental Affairs Committee, which is headed by Senator Joseph I. Lieberman, Democrat of Connecticut, who may be thinking of running for president in 2004. Several congressmen demanded again today that the White House release records of all its contacts with Enron executives, including telephone and e-mail messages.
"In contrast to the six contacts the White House disclosed," Mr. Waxman said, "I suspect there were dozens of conversations between administration officials and Enron representatives during the past year. The public and Congress should have this information, especially since it is now clear the White House had knowledge that Enron was likely to collapse but did nothing to try to protect innocent employees and shareholders who ultimately lost their life savings."
Political operatives and advocates of campaign finance reform said the Enron matter's staying power would depend in large measure on how the administration handled it in the coming days and weeks.
"The Enron scandal clearly moved to a new stage today," said Fred Wertheimer, president of Democracy 21, a public policy group, "and it has reached a point where it will now demand serious national attention." Just as the Congressional committees and the news media are gearing up for what promises to be an inquiry that could last months, if not years, the principals have hired lawyers with golden tongues and lengthy experience in dealing with scandals.
David Boies, a leading trial lawyer, represents Andrew S. Fastow, Enron's former chief financial officer. W. Neil Eggleston, a prominent Washington lawyer, represents Enron's outside directors.
And Robert S. Bennett, the Washington lawyer who represented President Bill Clinton in the Paula Jones matter, is now Enron's lead Washington lawyer.
Mr. Bennett said today that he welcomed the criminal inquiry because it would "bring light to the facts." But he also warned that the Congressional inquiries could easily degenerate into a "circus atmosphere."
Enron Asked Officials for HelpCBS MarketWatch by Rex Nutting January 11, 2002
WASHINGTON - Two Bush administration cabinet officers were contacted by Enron Chairman Ken Lay just weeks before the energy trader collapsed in the largest U.S. bankruptcy in history, the White House disclosed Thursday.
The revelations, which came a day after the Department of Justice launched a criminal probe of the Enron bankruptcy, pose the specter of a political scandal at a time when President Bush's war on terrorism has boosted his approval ratings to record highs.
Bush promised Thursday that his personal and political ties with Lay, a major contributor to Bush and the Republican party, would not stand in the way of a full federal investigation into America's largest bankruptcy ever.
"This administration will fully investigate issues such as the Enron bankruptcy to make sure we can learn from the past and make sure that workers are protected," Bush told reporters before a White House meeting with his economic team.
"The administration is deeply concerned about its effects on the economy," Bush said of collapse of Enron. "We're also deeply concerned about its effects on the lives of our citizenry." Bush said he had never discussed Enron's financial situation with Lay and had not met with Lay since a fund-raiser in Houston last spring.
But the links between the administration and Enron executives run deep. Attorney General John Ashcroft and his chief of staff have removed themselves from any involvement in the Justice Department's probe into Enron's accounting methods. Ashcroft received more than $50,000 in campaign contributions from Enron and Lay for his unsuccessful Senate campaign in 2000.
Lay contacted Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans last fall to discuss Enron's financial difficulties, White House spokesman Ari Fleischer said Thursday. The cabinet officials hadn't previously disclosed the contacts.
Lay told Evans he would welcome any support in helping the company deal with a bond-rating firm that was considering downgrading Enron. Enron's credit rating was critical because if it was lowered, $3.9 billion in debt would come due. Of that amount, $2.4 billion previously had been hidden in partnerships that were created to keep debt off Enron's books.
Evans quoted Lay as saying, ``I would appreciate any support you could give,'' and said Lay was not more specific. ``I did nothing,'' Evans said of his response to the plea. ``It was a no-brainer.'' Evans, one of Bush's oldest friends, said he didn't tell the president about the call. ``I didn't think he needed to know,'' he said in an interview with the Associated Press.
"O'Neill said that he had been contacted by Mr. Lay in the fall of last year and Mr. Lay brought to the secretary's attention his concerns about whether or not Enron would be able to meet its obligations," Fleischer told reporters. "And he expressed his concern about the experience that Long-Term Capital went through when Long-Term Capital went bankrupt."
Fleischer said O'Neill took the matter up with Undersecretary Peter Fisher, who concluded that Enron did not pose a systemic risk as Long-Term Capital had.
When the Long-Term Capital Management hedge fund collapsed in September 1998, the New York Federal Reserve Bank took the unusual step of leaning on its top creditors to ensure that there would be no contagion from its collapse. Long-Term had leverage of more than $100 billion against assets of less than $2 billion.
Fleischer said the decision by O'Neill and Evans not to report their contacts from Lay to Bush was appropriate.
Lay's ties to administration
Lay met with Vice President Dick Cheney last spring as part of Cheney's overhaul of national energy policy. Cheney has confirmed that Lay and his company executives held six meetings with Cheney and his staff.
Lay was a top fund-raiser for Bush in the 2000 election when Evans was campaign chairman. He also donated money for the inauguration and for the legal battle in Florida. Bush said he first got to know him when Lay was supporting Democratic Gov. Ann Richards in 1994.
That's the same year Lay gave $1,000 to Ashcroft, then a Republican senator from Missouri. Lay also hosted a campaign fund-raiser for Ashcroft in 1998 when he was exploring a presidential bid.
The $25,000 received by Ashcroft's Victory Committee in 2000 was the only contribution Enron's political action committee made to an individual campaign committee. The $25,000 it received from Lay was the largest contribution Lay made to any congressional candidate.
The Justice Department said Deputy Attorney General Larry Thompson would make all top level decisions concerned the Enron probe.
Former CEO Jeffrey Skilling has not been subpoenaed by the Justice Department but will cooperate fully, his spokesman told Dow Jones Newswires.
None of the company's top officers have been subpoenaed yet by the Justice Department, said attorney Robert Bennett, who's representing the company.
The SEC, the Labor Department, and several congressional committees have opened probes into Enron as well.
Andersen, Enron's auditor, said Thursday it had inadvertently destroyed "a significant but undetermined number of documents," including e-mail, that the investigators had requested about the clean bill of health it had given Enron.
"Millions of documents related to Enron still exist," Andersen said.
Andersen said it had informed investigators about the loss of documents and immediately suspended its "records management policy."
Andersen said it has asked former Sen. John Danforth, R-Mo., to help it review the incident and recommend changes in policies.
"Destruction of documents is obviously an extremely serious matter. Documents are an essential ingredient in our investigations," said Stephen Cutler, the SEC's director of enforcement, according to Reuters.
"One way or another, our committee will get to the bottom of this debacle," said Rep. Billy Tauzin, R-La., chairman of the House Energy and Commerce Committee. He said those responsible for the destruction should be fired if it was done out of stupidity or prosecuted if it was done to block the investigation.
Fleischer warned Congress not to conduct a "partisan witch hunt" into Enron, noting that Enron executives had also contributed heavily to Democrats. In the latest election cycle, Democratic congressional candidates received about $368,000 in hard money contributions from Enron-affiliated donors while Republicans received about $764,000.
Bush said the Treasury, Labor and Commerce departments would convene a working group to examine whether pension laws should be amended to give workers better protection during bankruptcies.
Defined-benefit pensions are guaranteed by the federal Pension Guaranty Benefits Corp., but defined-contribution plans such as 401(k), IRA or Keogh plans are not protected.
Many Enron workers have testified that they lost their retirement savings when the company blocked them from trading Enron stock from their retirement accounts as the stock collapsed.
At the same time, many executives were able to sell before the bottom fell out. According to a civil suit, top executives sold $1.1 billion worth of stock just before the bankruptcy.
In addition, Bush said the SEC, the Commodity Futures Trading Commission, the Federal Reserve and the Treasury would look into the adequacy of corporate disclosures.
"There needs to be a full review of disclosure rules to make sure that the American stockholder, or any stockholder, is protected," Bush said.
Enron filed for bankruptcy Dec. 2 after it restated its earnings on Nov. 8, saying it had hidden hundreds of millions in losses at several closely related partnerships.
At one point Enron was the seventh-largest company in the United States based on revenue. It was once the world's top buyer and seller of natural gas and the largest electricity marketer in the United States. It also marketed coal, pulp, paper, plastics, metals and fiber-optic bandwidth.
Enron is not Bush's WhitewaterCBS MarketWatch by David Callaway January 11, 2002
SAN FRANCISCO -- The Enron debacle won't be President Bush's Whitewater. It will be much worse.
Unlike the financial sideshow over a 20-year-old failed land deal that dogged the Clinton administration, the collapse of the nation's largest energy trader into the nation's largest bankruptcy last month is set to go straight to the heart of exposing what is wrong with the way the Bush administration is conducting itself these days.
Once a buyer for Enron's energy-trading business is announced Thursday in New York, this story is going to shift in dramatic fashion to Washington, D.C., where there are already eight separate congressional probes into the collapse, one Justice Department investigation and scores of unanswered questions. Many of them concern the White House.
No smoking gun
Don't expect to see either Bush or Vice President Cheney directly linked to the financial shenanigans that brought Enron down. They won't be. This is not about finding a smoking gun, as much as some Democrats might wish it were.
What it is about, and what the public will get to hear and read about in wrenching detail over the coming months, is how business gets done down in Texas. How a small group of business leaders exert enormous clout over Bush and his team in getting the rules changed to their benefit.
It will explain why Bush has locked up presidential records, locked out any voices opposed to his pro-business agenda and rammed through an expensive economic plan that wiped out the budget surplus but to date hasn't had any positive effect on the economy.
It will explain what influence Enron Chief Executive Ken Lay and his advisers had with Cheney and his energy task force when they met six times last year while the vice president was putting together the administration's energy policy.
And it will explain why Bush is now thinking about acting on a proposal from that very task force that seeks to roll back a key provision of the Clean Air Act that helps keep factory pollution down by requiring new controls when old plants are upgraded.
A history of seeking favor
Business leaders have always sought favors from politicians. That's nothing new. But in the case of Enron and Lay, a night in the Lincoln Bedroom was never going to be enough.
Enron cultivated Bush from the time he first decided to run for governor of Texas, with executives donating a total of $623,000 to his two gubernatorial campaigns and presidential campaign, according to the Center for Public Integrity.
The company played a major role in Bush's decision to deregulate the Texas energy markets in 1999. Enron executives played a major role in Cheney's energy task force last year, meeting with the vice president's staff right up until a week before the company's stunning October announcement that it was slashing shareholder equity by $1.2 billion to cover losses in its off-balance-sheet partnerships.
And Lay, who donated $100,000 to the Bush inaugural, remains mired in a controversy about whether a curious phone conversation he had with Federal Energy Regulatory Commission head Curtis Hebert last May had anything to do with Hebert's replacement by Bush last summer with the head of the Texas Public Utility Commission.
This is just the beginning of what is going to come out once investigators do a little more digging, and once Lay and his minions are required to testify before Congress. Expect a steady diet of revelations about the extent of the energy giant's influence -- at the state, federal and even international levels.
Enron won't bring down Bush. He remains enormously popular for his handling of the war and the rebuilding of the country's psyche after the Sept. 11 terrorist attacks. But it will be a major thorn in his side through the rest of this presidential term, and it might even play a role in the next election, depending on what comes out.
Enron, the company, will soon be gone. But Enron, the symbol of how big business and big politics sometimes conspire to fix the game, is just starting to dawn on the national consciousness.
It's an ugly story. One that explains a lot about what's going on in our nation's capital right now. And it's only just beginning.
David Callaway is executive editor of CBS.MarketWatch.com.