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July - Duke Energy Employee Advocate

Deregulation - Page 8 - 2002

"Enron robbed the bank, Arthur Andersen provided the getaway car, and they
say you were at the wheel"- Rep. Jim Greenwood to David B. Duncan, auditor

Enron: Not the Only Bad Apple

Guardian Unlimited– February 2, 2002

The deregulation of the energy industry is rotten to the core, writes Greg Palast

I guess I'm not a nice guy. But when I heard that Enron's former vice-chairman Cliff Baxter had shunted his mortal coil, I shed no tears.

One tabloid even called Baxter a "hero" who courageously raised the alarm about his company's fantasy financials.

Maybe I'm missing something here, but this is the Baxter who last year quietly crawled out of Enron like a cockroach from a rotting log - then dumped his stock on unsuspecting buyers, thereby pocketing a reported $35m (£25m). You can just imagine Baxter chuckling to himself in January last year as Enron's office staff gathered their pennies for his retirement gift while he's thinking, "So long, suckers!" - knowing they are about to lose their jobs and life savings.

There have been a lot of misplaced tears in the Affair Enron. The employees were shafted, no doubt about it. But the shareholders?

I didn't hear any of them moan when Enron stock shot up through the roof when the company, joined by a half dozen other power pirates, manipulated, monopolized and muscled the California electricity market a year ago.

All together, Enron and half a dozen others skinned purchasers for more than $12bn in excess charges. That's the calculation of Calfornia's utility watchdog as presented to federal regulators in a damning petition for refunds.

Here's an example of how Enron's po' widdle stockholders, hero Baxter and chairman Ken Lay made their loot.

Soon after California dumbly deregulated its power markets, Enron sold 500 megawatts of power to the state for delivery over a 15-megawatt line. Very cute, that: the company knew darn well the juice couldn't make it over the line, causing panic in the state - customers would then pay 10 times the normal cost to keep the lights on and traders could cash in.

The federal regulator caught that one. Within weeks of taking office, George Bush demoted the troublesome official. Lay boasted to one candidate expected to replace the sacked regulator that President Bush had given Enron veto over the government appointment.

Nor did Enron's stockholders object to their profitable business of trading politicians like bags of sugar. From Texas to Argentina to Britain, Enron used legal but sick-making use of political donations, consultancies and lobbying to twist contracts, rules and regulations to their liking.

You want to cry for a power industry exec who came to an early, violent, end? Then let me suggest to you Jake Horton, late senior vice-president of Gulf power, a subsidiary of Southern Company. (Southern is one of Enron's cohort in that fixed casino called the US electricity market.)

Horton apparently knew about some of his company's less-than-kosher accounting practices; and he had no doubt about its illegal campaign contributions to Florida politicans - he'd made the payments himself.

But unlike Baxter, who took the money and ran, in April 1989, Horton decided to blow the whistle, confront his bosses and go to state officials.

He demanded and received use of the company's jet to go and confront Southern's board of directors. Ten minutes after take-off, the jet exploded.

While the investigation into the plane crash was inconclusive, the company's CEO believed his death was suicide. He told the BBC: "I guess poor Jake saw no other way out."

Ultimately, Southern pleaded guilty to the charges related to the illegal payments.

Jake and Baxter are the beginning and end of the story of deregulation. I was part of a team investigating Southern's finances after Jake's plane went down, just after a grand jury voted to charge his company with criminal racketeering for manipulating its accounts.

Millions of dollars were charged to customers of Southern's subsidiary, Georgia Power, for spare parts that were not used.

The internal revenue service recommended indictment, but George Bush Sr's justice department put the kibosh on the prosecution (their legal prerogative) - in great part because the fancy financials had been blessed by the company's auditor: Arthur Andersen.

The company denied any wrongdoing.

But while Southern Company didn't face criminal charges, regulators ordered it to pay back millions to its customers.

And that's the big connection to Enron. Because it was in those years of investigation that Southern Company led the fight to "deregulate" the power industry. Rather than conform to the rules, they lobbied to get rid of the rules.

Southern and its buddies in the power industry were successful beyond imagination. Industry lobbyists and lawyers eviscerated America's Public Utilities Holding Company's Act, and made mincemeat of the rules which once barred power companies from making donations to political campaigns.

Crucially, in the newly deregulated power markets, the companies were relieved of the requirement to follow the strict government-designed Uniform System of Accounts.

Enron, founded in 1986, was the Rosemary's Baby of this satanic coupling of free-market ideological hoodoo and electricity industry greed.

Enron played it faster and looser than the others, but it is wrong and dangerous to say Enron was one bad apple.

It's the whole wormy tree of public services deregulation mania which is rotten, root and branch.

Greg Palast is the author of The Best Democracy Money Can Buy and Democracy and Regulation, both of which will be published in April.

The Art Formerly Known as Fraud

New York Times – by Paul Krugman – February 2, 2002

Here's a scary question: How many more Enrons are out there?

Even now the conventional wisdom is that Enron was uniquely crooked. O.K., other companies have engaged in "aggressive accounting," the art form formerly known as fraud. But how likely is it that other major companies will turn out, behind their imposing facades, to be little more than pyramid schemes?

Alas, it's all too likely. I can't tell you which corporate icons will turn out to be made of papier-mâché, but I'd be very surprised if we don't have two, three, even many Enrons in our future.

Why do I say this? Like any crime, a pyramid scheme requires means, motive and opportunity. Lately all three have been there in abundance.

Means: We now know how easily a company that earns a modest profit, or even loses money, can dress itself up to create the appearance of high profitability. Just the simple trick of paying employees not with straight salary, which counts as an expense, but with stock options, which don't, can have a startling effect on a company's reported profits. According to the British economist Andrew Smithers, in 1998 Cisco reported a profit of $1.35 billion; if it had counted the market value of the stock options it issued as an expense, it would have reported a loss of $4.9 billion. And stock options are only one of a panoply of techniques available to make the bottom line look artificially good.

Motive: The purpose of inflating earnings is, of course, to drive up the price of the stock. But why do companies want to do that?

One answer is that a high stock price helps a company grow; it makes it easier to raise money, to acquire other companies, to attract employees and so on. And no doubt most managers have puffed up their stock out of a genuine desire to make their companies grow. But as we watch top executives walk away rich while the companies they ran collapse (there are cases worse than Enron; the founder of Global Crossing has apparently walked away from bankruptcy with $750 million), it's clear that we should also think about the incentives of the managers themselves. Ask not what a high stock price can do for your company; ask what it can do for your personal bottom line.

Not incidentally, a high stock price facilitates the very accounting tricks that companies use to create phantom profits, further driving up the stock price. It's Ponzi time!

But what about opportunity? A confluence of three factors in the late 1990's opened the door for financial scams on a scale unseen for generations.

First was the rise of the "new economy." New technologies have, without question, created new opportunities and shaken up the industrial order. But that creates the kind of confusion in which scams flourish. How do you know whether a company has really found a highly profitable new-economy niche or is just faking it?

Second was the stock market bubble. As Robert Shiller pointed out in his book "Irrational Exuberance," a rising market is like a natural Ponzi scheme, in which each successive wave of investors generates gains for the last wave, making everything look great until you run out of suckers. What he didn't point out, but now seems obvious, is that in such an environment it's also easy to run deliberate pyramid schemes. When the public believes in magic, it's springtime for charlatans.

And finally, there was (and is) a permissive legal environment. Once upon a time, the threat of lawsuits hung over companies and auditors that engaged in sharp accounting practices. But in 1995 Congress, overriding a veto by Bill Clinton, passed the Private Securities Litigation Reform Act, which made such suits far more difficult. Soon accounting firms, the companies they audited and the investment banks that sold their stock got very cozy indeed.

And here too one must look not only at the motives of corporations, but at the personal motives of executives. We now know that Enron managers gave their investment bankers — not their investment banks but the individual bankers — an opportunity to invest in the shell companies they used to hide debt and siphon off money. Wanna bet that similar deals didn't take place at many other firms?

I hope that Enron turns out to be unique. But I'll be very surprised.

Audit Firms Clean Up Act

New York Times – by Jonathan D. Glater – February 2, 2002

(2/1/02) - Four of the five biggest accounting firms said yesterday that they would reject the industry practices that have prompted extensive criticism of Arthur Andersen, which audited financial statements of the Enron Corporation.

PricewaterhouseCoopers and Andersen said that they would no longer provide certain technology consulting services to clients whose books they audit and would stop providing internal and external audit functions at the same company. Ernst & Young and KPMG, which have shed their consulting businesses, said they would support the same measures, which are intended to avoid perceived conflicts of interest.

The remaining big firm is Deloitte & Touche, which has repeatedly stated its intention to keep consulting and audit services under one roof, a position that Andersen had supported until now.

The scramble by most of the big firms to bolster their image shows just how worried accountants are about the prospect of new regulations or legislation. By acting now, the firms' executives hope to preempt such moves and preserve as much business as possible.

"They're under the gun," said Arthur Levitt, a former chairman of the Securities and Exchange Commission, adding that the proposals were constructive. "It suggests that the firms have gotten the message. We'll have to see the details of what they've agreed to and how it's brought about."

Enron's use of partnerships and other financing vehicles, and the role played by Arthur Andersen, remains sketchy. Legislators complained yesterday that Enron, which has filed for bankruptcy protection, has refused to turn over important records.

Executives of the firms are trying to head off legislation or regulation that they regard as too tough, said Arthur W. Bowman, editor of Bowman's Accounting Report. Even if the Big Five firms fail to deter the S.E.C. from issuing new rules, he said: "This will mollify Congress, and Congress won't pass laws. If the S.E.C. sets up a rule, the S.E.C. can change a rule. If Congress passes a law, its hard to change."

The three companies that still provide extensive consulting services — PricewaterhouseCoopers, Deloitte and Andersen — are not big in the global consulting market, accounting for less than 9 percent of the $387 billion spent in 2000 on "information technology professional services," which includes consulting and other services not related to auditing, according to Gartner Dataquest, a market research firm.

Still, consulting services remain significant sources of revenue for them, and the idea of separating consulting from auditing is symbolic because it was championed by Mr. Levitt when he was the nation's top securities regulator.

PricewaterhouseCoopers went the furthest of the large accounting firms, stating that in addition to discontinuing the practice of providing internal audit services and technology consulting services to companies that it audits, it would disclose more information about its business, compensation and audits to investors and clients even though it is not publicly traded.

One PricewaterhouseCoopers client, the Walt Disney Company, said yesterday that it would no longer buy consulting services from the same firm that audits its book, one of the first major companies to make such an announcement.

Joseph Berardino, Andersen's chief executive, has said that the firm is engaged in a comprehensive review of its policies and its services, and yesterday's announcement may be only one result. Patrick Dorton, a spokesman for Andersen, said, "We will shortly be announcing a package of measures that will substantially change the way Andersen does business."

Accenture, formerly known as Andersen Consulting, was separated from Arthur Andersen in 2000 by an arbitrator who resolved a longstanding dispute between them, and Andersen has since worked to build its own consulting practice.

Andersen was paid about $27 million by Enron for consulting and about $25 million for audit services in 2000. Over all, slightly more than half of Andersen's $9.3 billion in revenue in the year ended Aug. 31 came from consulting services. Along with providing both types of services, the firm served at times as internal auditor, reviewing Enron's finances, and external auditor, putting its seal of approval on Enron's annual financial statements.

The latest moves are intended to address perceived conflicts of interest at accounting firms, said Samuel A. DiPiazza Jr., chief executive of PricewaterhouseCoopers. "There's a perception issue," Mr. DiPiazza said in an interview yesterday. While providing consulting or other services is not necessarily a problem for auditors, he continued, "that perception needs a response."

Stephen G. Butler, chairman of KPMG, said in a conference call yesterday that the firm was willing to concede on the separation of consulting services to shift attention to improving what he described as outdated financial disclosures.

A spokeswoman for the American Institute of Certified Public Accountants said the association would support a ban on selling consulting to audit clients.

"We need an accounting model that appropriately recognizes the value of intangible assets, which make up more and more of the value of today's corporations," Mr. Butler said. Corporate financial information should also be released more frequently than once a quarter, he said. He acknowledged that the steps would not necessarily have prevented a disaster like Enron, where executives took steps to keep the company's debt load hidden.

Deloitte & Touche released a statement responding to the other firms' announcements yesterday, saying, "It is premature to accept or reject any single proposal, whether we agree with it or not, because the effectiveness of a complete set of reforms is what ultimately needs to be assessed."

The steps proposed by the four big firms would not have prevented Enron's collapse, Mr. Bowman said. "Scope of services is where everybody's looking," but that is not the real problem, he said.

"It's analysts pushing quarterly results," he added, "it's corporate America paying people in stock incentives — all those things are driving everyone to aggressively push the accounting rules, to show increased revenue and increased profits."

Giving up consulting will be less of a hardship for KPMG and Ernst & Young, because both have already shed their consulting practices but still provide some nonaudit services. Nor will it cause much pain at PricewaterhouseCoopers, which plans to spin off consulting through a public stock offering in the spring, Mr. DiPiazza said. Lucrative tax advisory services will probably be kept by the accounting firms because they are closely related to auditing.

If the big firms do less technology consulting, of course, it could be a boon to other firms in that industry, like Accenture and I.B.M. Global Services. Alternatively, the accounting firms could still provide consulting services to one another's clients.

Connecticut's attorney general, Richard Blumenthal, has called for his state to review accountants' practices, and perhaps to suspend Andersen's license to practice in the state.

New York State's comptroller, H. Carl McCall, yesterday joined the chorus of critics of accounting as it is now practiced, urging the S.E.C. as well as the governor to prohibit accountants from selling consulting services to the companies they audit and also requiring companies to rotate auditors every seven years. Mr. McCall also proposed prohibiting companies from hiring accountants away from their audit firms for two years.

Executives at the accounting firms said their announcements were made in response to concerns by lawmakers and investors about the trustworthiness of financial disclosures.

Andersen is under intense scrutiny after reports that its employees destroyed Enron-related documents earlier this month. The firm has acknowledged that it is losing business because of adverse publicity, and in particular, will have trouble signing up new clients.

"It's a national tragedy that what happened with Enron brought a great company like Arthur Andersen to its knees," Mr. Levitt said. "I would hope that Andersen doesn't fail."

Shreds of Enron Evidence

ABC News - by Brian Ross - January 31, 2002

Jan. 29 — Enron kept shredding company documents after a company directive to stop the practice, including shredding some papers as recently as this month, and on a much larger scale than previously acknowledged, ABCNEWS learned today.

Last week Enron attorney Bob Bennett told ABCNEWS all employees had been forbidden to shred any documents as of Oct. 25.

"At a very early time, the legal team made all employees aware of the pending litigation and that all documents should be retained," Bennett told ABCNEWS. "If anyone has disobeyed that policy or if anyone is discovered to have shredded documents, it will not be tolerated and severe action will be taken." But today Bennett said Enron called in a huge mobile shredding truck from the Shredco company in December, and shredders from another company in January, to destroy documents at its Houston headquarters.

Enron said the documents, which are turned into confetti at a rate of 7,000 pounds an hour, were not covered by any subpoenas and were business proposals, payroll material, and credit union documents. The chairman of a House subcommittee investigating Enron, Rep. Jim Greenwood, called it unacceptable. "That's outrageous," said the Pennsylvania Republican. "Enron is being investigated by the Congress, by the Justice Department, by the SEC [Securities and Exchange Commission]. They shouldn't shred so much as an old newspaper without letting us know what they're doing ahead of time."

The federal investigation of Enron began in the last week of October, but it was not until last week that Enron says it finally stopped all shredding and turned away the shredding trucks, part of what the company calls an expanded policy on handling documents.

Shredding Shouldn’t Have Happened

Enron's lawyers insist no pertinent evidence has been destroyed in the most recent shredding.

But outraged federal investigators say that's something for them to decide, not Enron.

The Shredco Web site guarantees destruction: "You threw it away. Or so you thought. Now you're being sued. Don't just throw it away. Destroy it!"

And there's little chance of ever putting the pieces back together. "It would be virtually impossible given the sheer nature of the volume that a commercial shredder deals with," said David Culbertson, the president of the National Association of Information Destruction and Houston's Texas Shredding Co

Enron’s Role in Power Prices

Seattle Times – by H. Bernton, A. Scott – January 30, 2002

Enron used its clout in the Northwest power market to set artificially high prices in a segment of the Northwest electricity market, a Portland utility analyst contends.

Robert McCullough, a veteran consultant who has worked for utilities and the state of California, said that when Enron filed for bankruptcy last month, long-term contracts for power dropped 23 percent over the next two weeks. That's evidence Enron was keeping prices up, he says.

However, other energy analysts and traders discount McCullough's theory, saying other forces such as weather and shifting supplies played a much greater role in electricity price spikes.

McCullough, who is scheduled to testify today before a U.S. Senate committee, has theorized that Enron may have tried to prop up prices for trades known as a forward contracts, which provide electricity months or years in advance.

Enron officials have repeatedly denied allegations of market manipulation. Spokesman Mark Palmer says Enron, as a buyer and seller of electricity, didn't try to influence the overall direction of the market.

Washington, Oregon and California officials are examining wholesale power trading, trying to understand why wholesale energy prices jumped tenfold in late 2000 and early 2001. Some experts say the crisis, caused by California's deregulation and drought in the Northwest, was worsened by power-plant operators taking their generators offline for maintenance at key times.

McCullough posits that Enron's trading may have exacerbated the crisis. He alleges that Enron may have tried to affect the thinly traded market for power scheduled for delivery in 2003, 2004 and later. Because there's relatively little volume in those markets, prices are more easily affected by relatively small amounts of buying and selling, McCullough said. When Enron collapsed, prices for futures fell along with spot, or short-term, prices. McCullough maintains Enron's collapse was the only factor operating on the market early last month.

"No other changes in operations, hydroelectric supply or fossil-fuel prices took place at that time," McCullough said.

"The clear implication is that Enron may have been using its market dominance to set forward prices."

Other industry observers say market forces played the dominant role in the slump in prices last month. They say it's hard to isolate Enron's effect from end-of-the-month reports that noted a huge Northwest snowpack and improved prospects for hydropower generation.

"Enron's bankruptcy may have had an isolated effect, and created some bearish pressure on the market," said Mike Wilczek, a reporter for Platt's Energy Trader.

"But you guys had a drought of biblical proportions, and now the National Weather Service is forecasting water supplies near normal. These are the fundamentals that are driving the market."

Planet of the Privileged

New York Times – by Maureen Dowd - January 29, 2002

Oh, the pull of Planet Enron.

The atmosphere there was so rarefied that its inhabitants were blissfully oblivious to how privileged they were.

It was a lovely place, sort of like Aspen with oil rigs. The skiing was great because there was always a pristine powder of newly shredded financial records on the slopes.

There was offshore drilling off every shore and offshore subsidiaries on every corner.

A red flag fluttered on Planet Enron, but nobody paid attention.

Journalists in Washington were hunting for Dick Cheney for months, even as he was completely visible and accessible on Planet Enron, where he lumbered down golden boulevards.

Phil and Wendy Gramm, the king and queen of the Enron prom, cruised around in their white stretch limo, rewarded for years of service, exempting and deregulating.

Paul O'Neill was also ubiquitous there, his face emblazoned and his words enshrined on the currency, which begins with $1,000 bills. The motto: "Companies come and go. It's part of the genius of capitalism."

Mr. O'Neill was not Treasury secretary up there, though, merely a private citizen. Kenneth Lay, still smarting that the president decided not to name him Treasury secretary on Earth, anointed himself with the title on Enron.

The Bushes summered there, and W. and Jeb dropped by when they needed campaign cash. But lately, they began putting brown paper bags over their heads when they visited so no one would notice them hobnobbing with Kenny Boy.

Everyone was upwardly mobile on Planet Enron, a world more consumed with havens than have-not's. There were, blessedly, no lower classes or riffraff. Denizens were blue blood or blue chip but never blue. There were the born rich, and there were the new rich the born rich made rich. The congenitally rich create the crony rich by ushering them onto the boards and payrolls of oil and energy companies and defense contractors.

There was no conflict of interest on Planet Enron, only confluence of interest. No income tax, only insider tips. No S.E.C. or G.A.O., just C.E.O.'s, S.U.V.'s and N.O.B.D.'s (not our bankruptcy, dear). Q.E.D. All meetings on Planet Enron were held in secret, and everyone liked it that way. Auditing was considered rude. It was a very empathetic place.

On Planet Enron, it seemed only fair that chairman-for-life Kenneth Lay should reward himself with $51 trillion in a severance package, as opposed to the $51 million he was seeking on Planet Earth.

On Planet Enron, Secretary of the Army Thomas White could whine that he came out with only $12 million from sales of the company's stock. He bravely said he "would persevere."

On Planet Enron, Karl Rove could expect people to mist up at the poignant tale of how he made mere millions instead of more millions when government ethics rules forced him to sell all of his stocks. And he could ingratiate himself with the conservative leader Ralph Reed by offering him a piece of the Enron rock. On Planet Enron, the president, his words muffled by the brown paper bag on his head, could strike a chord complaining that his mother-in-law had lost $8,000 on Enron stock when less connected mortals lost their entire retirements.

It was a beautifully sheltered place (and not just in the Caymans sense). A place where inhabitants deluded themselves that their accomplishments and windfalls — Ivy League degrees, energy company sinecures, lucrative consulting contracts, advisory board booty — were the result of merit and hard work.

But then turmoil struck. The planet has been overrun by the Wrong Kind: government lawyers bearing subpoenas and grand juries poking around. The thin and tony air has become noxious with the threat of litigation and incarceration.

Dick Cheney is still there, but he's hiding in a secure location. Now he has caves on two planets. President Bush, distancing himself by light-years, has ordered the U.S. government to look into cutting off all business with the planet.

On Friday, the once-serene orb imploded with the news of the sad death of a leading citizen, who shot himself in his Mercedes after telling friends he did not want to have to turn against his own.

But Planet Enron is bigger than one company or one tragedy. It's a state of mind, a subculture, a platinum card aristocracy. Its gravitational pull has long proven irresistible.

Suicide Victim Was to Testify

New York Times – by J. Yardley, S. DeWan – January 27, 2002

HOUSTON, Jan. 26 — Cliff Baxter was supposed to be on a boat right now, floating on some endless expanse of blue water beneath endless blue skies. That was the party line when he left Enron last May as vice chairman, and if former colleagues now say it was never that simple, they nonetheless expected him to be living the good life.

The son of a police sergeant, Mr. Baxter was getting out of Enron as a rich man at a time when his vision for the company apparently clashed with those of many of its top executives. He had helped create the company's centerpiece business, its energy trading operations, and had risen to vice chairman, a grand title for a man from ordinary beginnings.

He had a loving wife and two children and a big new house in an exclusive suburb. He could afford to do anything, or nothing at all.

But if Mr. Baxter left Enron months before trouble engulfed the company, those troubles seemed to be engulfing him when he was found dead early Friday morning, shot once in the head. An autopsy was completed on Friday, and the death has been ruled a suicide, a representative of the Harris County Medical Examiner's Office said today.

Mr. Baxter had been subpoenaed by Congress to testify about Enron, and investigators hoped he would be a helpful witness against his former peers since his name had surfaced as someone who had complained "mightily" about the financial partnerships now at the center of the company's collapse. He had also been named as a defendant in a shareholder lawsuit.

His anguish became evident to those who bumped into him in recent weeks. People who saw him at the Houston Yacht Club, where until recently Mr. Baxter kept a boat, Tranquility Base, noticed that his salt- and-pepper hair had turned mostly white between December and January, said the club's president, Chuck Buckner.

"Cliff was a guy who clearly seemed to be very concerned that people would think ill of him whether he'd done anything wrong or not," said Mr. Buckner, a partner with Ernst & Young. At the club's Christmas party in December, Mr. Buckner said, he and Mr. Baxter spoke only in general terms about Enron.

"I thought he was a man who'd got out on time, but a man who'd be concerned about what happened to the company," Mr. Buckner said. "He worked really hard. This was the son of a policeman. This wasn't a rich kid."

The mail carrier in the neighborhood, Veronica DeLaCruz, said that Mr. Baxter's mail had been full of certified letters from law firms in Houston and elsewhere in recent months, and that his wife regularly signed for them. But in recent weeks, as the certified letters kept coming, no one came to the door to sign. "They were very, very to themselves," said a next-door neighbor who spoke on the condition of anonymity. "They spent most of their time on their yacht."

Police investigators in Sugar Land, the affluent Houston suburb where Mr. Baxter's body was discovered inside his parked Mercedes- Benz, have refused to reveal the contents of a suicide note he left behind, but CNBC has reported that Mr. Baxter wrote that he was distraught over Enron's disintegration and the prospect of having to testify against friends there.

His reputation among friends and colleagues was of a man of high integrity who could be an intimidating negotiator, sometimes arrogant and brash in a typically Enron mold. He liked expensive cars and motorcycles, and one former colleague, Michael P. Moran, recalled seeing a Ferrari, a Lexus, an S.U.V. and more in his parking spot.

"He was really pretty typical of what the Enron culture was, although he was a very principled individual," said Mr. Moran, a retired general counsel of Enron's natural gas pipeline group who is now serving on the creditors' committee overseeing the bankruptcy.

Mr. Moran said he was shocked by Mr. Baxter's death because he had had neither financial problems nor a major hand in the company's decline. But, he said, Mr. Baxter had always been concerned about the fate of workers when he was buying or selling companies.

"The thought has crossed my mind," Mr. Moran said, that the suicide came because "he was so disturbed by all the things that were going on."

Before he left Enron, Mr. Baxter, like many of the company's executives, was active in charity work, particularly for Junior Achievement of Southeast Texas. Jerry V. Mutchler, the group's president, described him as "very gregarious, a very big thinker and one of those people who thought you should give back." Mr. Mutchler said Mr. Baxter had raised hundreds of thousands of dollars for the group because he wanted to help make certain young people "understood the values of the free enterprise system."

Doug Leach, a vice president of Enron Global Markets, said one of Mr. Baxter's fund-raisers for Junior Achievement was called Birdies for Charity. A putting green was set up in the Enron lobby for employees who passed by. "They would pay to make a putt, and Enron would match the funds," Mr. Leach said. "He held his own as a putter. He had fun, he got into it.

"That's the part of Cliff I got to know, and that's why this is so sad."

Mr. Baxter grew up in working- class Amityville, N.Y., on the south shore of Long Island, one of six children of a father who was a local police sergeant and a mother who worked for the Town of Babylon. He graduated with honors from New York University, became a captain in the Air Force and earned a master's degree in business at Columbia University.

Arriving at Columbia Business School as a married father recently discharged from the Air Force, Mr. Baxter did not fit the typical profile of an incoming student.

Dan Nagao recalled that Mr. Baxter had approached him in an accounting class after noticing in the student directory that Mr. Nagao, too, had served in the military. They became friends, Mr. Nagao said, and he recalled that Mr. Baxter had joined a rock band as a guitarist, hustled fellow students in pool and joined investment and entrepreneurial clubs on campus.

For years, Mr. Baxter and Mr. Nagao stayed in touch, talking, exchanging e-mail messages, swapping Christmas cards. Mr. Baxter talked about his two children and his wife, Carol, whom he had met while in the Air Force, but rarely about his job. Only last year, after Mr. Nagao asked Mr. Baxter what he did for Enron, did Mr. Baxter state, almost sheepishly, that he was the company's vice chairman.

This year, though, Mr. Nagao said the usual Christmas card with the long, handwritten note and the photo of his family did not arrive from Mr. Baxter. "It was something simple, but I remember mentioning to my wife that it was odd," said Mr. Nagao, who runs a human resources consulting company in Palo Alto, Calif. "I thought, maybe he's busy, maybe he's traveling. I was thinking of calling him, and just asking him, `Hey, is everything O.K.?' I regret not doing that now."

When Mr. Nagao learned of his friend's death on Friday, he was shocked. "I don't know what happened, and I would hate to even guess," he said. "We thought that Cliff would survive anything."

Ex-Enron Official Commits Suicide

Associated Press – by Kristen Hays – January 26, 2002

HOUSTON, Jan 25, 2002 - A former Enron Corp. executive who reportedly challenged the company's questionable financial practices and resigned last May was found shot to death in a car Friday, an apparent suicide.

Police in Sugar Land, a Houston suburb, confirmed the death of 43-year-old J. Clifford Baxter, a former Enron vice chairman. He was shot in the head.

A suicide note was found, police said, but its contents were not disclosed.

"We are deeply saddened by the tragic loss of our friend and colleague, Cliff Baxter. Our thoughts and prayers go out to his family and friends," the company said in a statement. Spokesman Mark Palmer had no additional comment.

Baxter was vice chairman of Enron when he resigned in May 2001, several months before the energy company's collapse.

Baxter was identified by name in the explosive warning that Enron executive Sherron Watkins wrote last August to company chairman Ken Lay.

"Cliff Baxter complained mightily to (then-CEO Jeff) Skilling and all who would listen about the inappropriateness of our transactions with LJM," Watkins wrote. LJM is one of the partnerships that kept hundreds of millions of dollars in debt off Enron's books.

Watkins identified Baxter in a section of her letter stating there is "a veil of secrecy around LJM and Raptor," another entity involved in the partnerships.

Watkins' letter to Lay stated that "we will implode in a wave of accounting scandals" unless the company changed its ways.

Enron's public downfall began in mid-October with the announcement of a $618 million third-quarter loss and a $1.2 billion reduction in the company's equity. Then the partnerships that kept debt off the books were revealed.

The company - once No. 7 on the Fortune magazine list of the 500 largest companies - rapidly descended into bankruptcy, the largest in history, on Dec. 2. Its chairman, Kenneth Lay, resigned this week. He has been one of President Bush's strongest supporters over the years.

Baxter's body was found around 2:30 a.m. Friday by a police officer checking on a Mercedes-Benz parked in a residential area not far from his home in Sugar Land. He was in the driver's seat. He had been shot with a revolver. Identification he was carrying indicated he worked for Enron.

Jim Richard, a Fort Bend County justice of the peace, ruled Baxter's death a suicide. He ordered an autopsy as a precaution.

Baxter's family could not be reached for comment. A woman answering the phone at the home hung up. Baxter was one of 29 former and current Enron executives and board members named as defendants in a federal lawsuit. Plaintiffs' lawyers said the executives made $1.1 billion by selling Enron stock between October 1998 and November 2001.

It said Baxter had sold 577,436 shares for $35.2 million.

At the time his resignation was announced, Skilling said Baxter had made "a tremendous contribution to Enron's evolution, particularly as a member of the team that built Enron's wholesale business."

It said his primary reason for resigning was to spend more time with his family.

Skilling himself abruptly resigned in August, citing personal reasons.

Skillling was "absolutely devastated at the loss of a very good friend," said Judy Leon, Skilling's spokeswoman. She declined to elaborate.

Baxter had joined Enron in 1991 and was chairman and CEO of Enron North America prior to being named chief strategy officer for Enron Corp. in June 2000 and vice chairman in October 2000, the company said. He was born in 1958 in Amityville, N.Y., and graduated from New York University in 1980. He was a captain in the U.S. Air Force from 1980-85 and received an MBA from Columbia University in 1987, according to the company.

Enron’s “Vapor Earnings”

New York Times – by Alex Berenson – January 26, 2002

A major division of the Enron Corporation overstated its profits by hundreds of millions of dollars over the last three years, and senior Enron executives were warned almost a year ago that the division's profits were illusory, according to several former employees.

The division, Enron Energy Services, competed with utilities to sell electricity and natural gas to commercial and industrial customers. It was run by Lou L. Pai, who sold $353 million in Enron stock over the last three years, more than any other Enron executive, and Thomas E. White, who left Enron to become secretary of the Army last June.

Energy Services accounted for a small part of Enron's revenue but was promoted by the company as a big growth opportunity. Unlike the complex partnerships and other entities that Enron used to move debt and losses on outside investments off its books, this unit was a real business with more than 1,000 employees and customers like J. C. Penney.

But former employees, including three who were willing to be identified, suggest that Energy Services used shoddy accounting practices to create "illusory earnings," in the words of Jeff Gray, who joined Enron in 2000 and worked at the division for most of 2001.

For example, by estimating that the price of electricity would fall in the future, Enron could book an immediate profit on a contract.

The employees' allegations raise fresh questions about Mr. White's role at Enron, where he was an executive for 11 years. In a disclosure last May, just before he became Army secretary, Mr. White reported that he owned more than $25 million of Enron stock and would be paid $1 million in severance from Enron.

Because he went from the Army to Enron and back to the Army, Public Citizen and others have voiced concerns about potential conflicts. While he was at Energy Services, it sold a $25 million contract to the Army. As secretary, he said that he would move energy services at bases to private companies, like Enron. A spokesman for Mr. White did not return repeated calls for comment. Mr. Pai, the former chairman, and a spokesman for Enron also did not return calls. Peggy Mahoney, a spokeswoman for Energy Services, said the division's financial results had accurately reflected its business. "It was no pie in the sky," she said. Enron created Energy Services in 1997 to take advantage of the deregulation of electricity markets nationally. It promised to cut its clients' energy costs by installing energy- saving equipment and finding cheaper natural gas and electricity.

Energy Services operated as essentially a freestanding company, but its results were included in Enron's financial statements, which were audited by Arthur Andersen. Energy Services organized itself so that it could use a financial reporting technique called mark-to-market accounting, which Mr. Gray and other former employees said the division had abused to inflate its profits.

Under traditional accounting, companies book profits only as they deliver the services they have promised to customers. But Energy Services calculated its profit very differently. As soon as it signed a contract, it estimated what its profits would be over the entire term, based on assumptions about future energy prices, energy use and even the speed at which different states would deregulate their electric markets.

Then Energy Services would immediately pay its sales representatives cash bonuses on those projections and report the results to investors as profits. By making its assumptions more optimistic, the division could report higher profits.

As a result, the sales representatives and senior managers pressed the managers who made the central assumptions about deregulation and energy prices, said Glenn Dickson, a manager at Energy Services who was fired in December.

"The whole culture was much more sales driven than anything else," Mr. Dickson said. "The people that were having to sign off on the deals with a gun to their head knew that it wasn't a good deal."

Mr. Dickson and other former employees said senior executives at Energy Services knew that their assumptions were unreliable. At the same time, expenses ballooned as Energy Services found that the costs of managing its contracts were higher than it had projected.

"They knew how to get a product out there, but they didn't know how to run a business," said Tony Dorazio, a former product development manager at Energy Services.

In 1999 and 2000, under the leadership of Mr. Pai and Mr. White, Energy Services would sign almost any deal, a former employee said. But by the end of 2000, the executives were no longer paying much attention to daily operations, Mr. Dickson said.

None of the former employees said they knew whether Mr. Pai or Mr. White were aware of any accounting lapses at Energy Services. With Energy Services hemorrhaging cash in 2000, even as it began to report profits to investors, the unit began reviewing some of the contacts to determine whether it had overstated its profits. But publicly, Enron continued to promote Energy Services' prospects. A year ago, Jeffrey K. Skilling, Enron's president at the time, told Wall Street that the division was worth about $20 billion.

"They said at one point they expected it to be as large as wholesale," said Jeff Dietert, an analyst at Simmons & Company in Houston. Enron's wholesale trading division, which bought and sold electricity and natural gas worldwide, was the source of most of its profits.

The division generated $165 million in operating profit on $4.6 billion in sales in 2000, in contrast to a loss of $68 million on sales of $1.8 billion in 1999, according to Enron's 2000 annual report.

Even as Enron promoted the division's potential, it accelerated its review of the contracts and brought in new management. By February 2001, Enron had transferred Mr. Pai out of the division and named David Delaney, who came from the wholesale business, as its top executive. A former brigadier general, Mr. White remained until he became secretary of the Army.

A former employee said that in February or March 2001, senior managers within Energy Services spoke to Richard A. Causey, Enron's chief accounting officer, to discuss potential losses associated with a handful of large contracts. The potential losses on those deals topped $200 million, the employee said.

About the same time, Mr. Delaney discussed the potential losses with Mr. Skilling and other top corporate executives, this employee said.

Sales slowed last year as Mr. Delaney forced the division to use more conservative and accurate projections when deciding on a contract, Mr. Dickson said. The move frustrated some sales representatives, but stemmed losses, he said.

Although Energy Services publicly reported profits until Enron collapsed, it continued to lose money last year because of the unprofitable contracts, employees said.

Margaret Ceconi, a former sales manager, sent a letter in August to Kenneth L. Lay, then Enron's chairman, saying that Enron had hidden losses on its contracts by putting them in the wholesale division.

"It will add up to over $500 million that E.E.S. is losing and trying to hide in wholesale," Ms. Ceconi wrote in her letter, which was previously reported in The Houston Chronicle.

Today, Energy Services is essentially a shell. After filing for bankruptcy Dec. 2, Enron walked away from many contracts, an action allowed under bankruptcy rules.

Energy Services' decision to exit so many contracts, including its largest, a $2.2 billion contract signed only last year with Owens-Illinois, the giant glass and plastic maker, is proof of the problems at the division, former employees said.

"They kept telling me, and I heard it many a time, that it was a sound business plan," Mr. Dorazio said. "After being in this business for 21 years, it didn't seem sound to me."

Deregulation - 2002 - Page 7