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Deregulation - Page 9 - 2002
called, appropriately enough, 'The Crooked E.' " - Rob Morse
Enron Code of EthicsSan Francisco Chronicle – by Rob Morse – February 10, 2002
Even before Enron melted down, the company's logo was called, appropriately enough, "The Crooked E." You can find that logo all over items offered for sale by laid-off Enron employees on EBay.
You can get a blue yo-yo emblazoned with the Crooked E, a fanny pack with the logo and the slogan "Ask why" (a slogan government investigators should take to heart) or an "Enron Values" paperweight, engraved with the words "integrity" and "respect" and a statement that "ruthlessness, callousness and arrogance don't belong here."
My favorite Enron item on EBay (with a bid of $202.50, as of yesterday) is a 64-page Enron code of ethics book -- "in perfect condition, like new." Never used.
Creative accounting made easy: Former Enron employee Matt Mitchell has a listing on EBay for what he describes as the "Enron Smoking Gun: Risk Management Manual." It has a section headed "Enhance Operating Margins," which teaches you how to "shift the realization of income and expense from period to period."
Mitchell, who has found another job at somewhat less pay, tells me there isn't anything illegal in the Enron risk-management manual, but the EBay listing attracted a lot of attention in the press.
"I almost feel guilty," he said. "I did this as a joke, but I got 9,000 hits and the top bid last time I checked was $960."
Laid-off Enron employees have lost their 401(k)s and are losing their homes, but Enron CEO Kenneth Lay is suffering, too. He's losing two homes and a lot - - but not a lot in the same sense as his former employees are losing a lot.
The Aspen Times reported this week that Lay has put three of his four Aspen properties on the market -- two homes at about $6.5 million each and an undeveloped lot for about $3 million. That leaves poor Ken Lay with only one house in Aspen. Awww.
Getting serious: Many Washington pundits have been saying that Enron isn't a political scandal, but simply a business scandal -- as if the business of the Bush administration isn't business, and the energy business at that.
I guess that's because in sex-obsessed, money-blinded Washington you can't have a scandal without a smoking intern. There's so much money, soft and hard, being floated to politicians that no one notices money, vast and untaxed, floating to the Caymans.
Sorry, this is a political scandal all the way. Never mind the fact that Lay and Bush were best pals, with Lay helping set the nation's energy policy. Just consider what the Enron collapse means for Social Security "reform," one of the biggest issues on Bush's political agenda.
Bush wants to turn a portion of Social Security funds into personal retirement accounts. In other words, money intended to be insurance against financial disaster would be handed over to Wall Street brokers, whose accounting practices and conflicts of interest lead to disasters like Enron.
Remember that when you see an Enron employee begging on the street in a T- shirt saying "My Enron account and 50 cents bought this T-shirt."
They're available, along with a lot of other anti-Enron T-shirts, from former Enron employee Tim Dalton at his web site www.thecrookede.com.
Snack attack: My colleague Rob Hurwitt suggests that from now on we refer to the chief executive as "Pretzeldent Bush."
Quick Fortunes For Enron InsidersNew York Times – by Kurt Eichenwald – February 6, 2002
They called it Southampton Place. To most people in Houston, it was the name of a neighborhood known for expensive homes and influential residents.
But to a small group of executives at the Enron Corporation, it meant something far different: the opportunity to obtain millions of dollars of cash, fast, with the money coming from the company's own coffers.
Details of the lucrative investments in Southampton, a limited partnership involved in dealings with Enron partnerships, were disclosed Saturday in a report released by a special committee of the Enron board. For directors and former employees, the details have proved to be some of the most emotionally charged disclosures in the lengthy report: a small group of insiders made millions in profits in secret deals with some of the partnerships that ultimately brought the company to its knees.
Two of the investors were able to transform $5,800, the price of a used car, into more than a million dollars each in just two months, according to the report. Andrew S. Fastow, the former chief financial officer of Enron and engineer of many of the partnership transactions, transformed a $25,000 contribution from a family foundation into $4.5 million in the same matter of weeks.
The deals in early 2000, which involved at least half a dozen Enron employees, violated the company's conflict of interest requirements. Last fall, when the first inklings of Southampton emerged, every senior executive investing in the deal who had not already been fired for a role in the partnership problems was terminated. Until then, the report says, no top officials of the company knew anything about — let alone approved of — the insider deal that had come from Mr. Fastow's finance division.
The investment was arranged by Mr. Fastow and another Enron employee, Michael Kopper, who both live in Southampton Place in Houston. Investigators working for the board committee worked to figure out why the two executives offered the lucrative opportunity to other corporate insiders, but were unable to find an answer.
Now, legal experts say, that same question is certain to be examined by Federal prosecutors investigating the Enron debacle.
Investigators will look for a quid pro quo arrangement in which something of value was expected from the investors in return for the lucrative opportunity to participate in such a profitable deal, said Stephen Meagher, a former federal prosecutor in San Francisco who handled white-collar cases.
A spokesman for Mr. Fastow declined to comment. Mr. Kopper did not return a telephone message left at his home.
The small group of other investors included only people who were involved in partnership transactions with Mr. Fastow. Mr. Kopper, like Mr. Fastow, also invested $25,000, through a partnership he called Big Doe — apparently a nod to the potential profits from the investment.
The other investors included Ben F. Glisan Jr., the former Enron treasurer who helped set up some Enron partnership deals with Mr. Fastow, and Kristina Mordaunt, a lawyer who worked for Mr. Fastow before becoming general counsel of the company's broadband division. Mr. Glisan and Ms. Mordaunt were the executives who each put up $5,800 for a return of $1 million.
Two other employees put up smaller amounts, and received thousands in return.
Henry F. Schuelke, a lawyer for Mr. Glisan, did not return a phone message. Ms. Mordaunt's phone number could not be found in a computer search. However, according to the report, she informed the committee that she never asked for and never provided anything in return for the Southampton investment. Mr. Glisan also told the committee that Mr. Fastow never asked him for any favors or other consideration in return for the Southampton investment.
For some legal experts, the Southampton transaction sounds eerily similar to a central part of the investment scandal at the investment house Drexel Burnham Lambert Inc. more than a decade ago. There, the man in charge of Drexel's junk bond operation, Michael R. Milken, offered lucrative interests in a partnership called MacPherson Investment Partners L.P. to a group of mutual fund managers. Some of those managers, who invested their mutual funds in other Drexel deals, were subsequently convicted on charges that they had accepted bribes in exchange for decisions they made for their funds.
With the Enron executives having fiduciary obligations to the company's shareholders, legal experts said, investigators will try to determine whether anyone appeared to modify their actions because of the investment opportunity.
The MacPherson case clearly has a role as precedent in this instance, said Mr. Meagher, the former prosecutor.
Kenneth J. Vianale, the main prosecutor in the MacPherson cases, declined to comment, citing a conflict; his firm has already brought class actions against Enron on behalf of shareholders.
According to the report, both Mr. Glisan and Ms. Mordaunt played roles in negotiating with Mr. Fastow's partnerships on behalf of Enron after they received their returns on the Southampton investment. That month, Mr. Glisan became treasurer of Enron, and was intimately involved that year in a series of partnership deals that played a major role in bringing down the company. Ms. Mordaunt was involved in at least one transaction with a Fastow partnership on behalf of Enron after her investment.
The Southampton Place partnership traces back to a $10 million investment by Enron in March 1998 in Rhythms Netconnections Inc., a privately held Internet service provider. Enron's stake, 5.4 million shares originally priced at $1.85 each, proved to be enormously profitable, at least for a while.
A little more than a year after Enron purchased its stake, Rhythms went public at $21 a share and closed on the first day of trading at $69. Soon Enron's stake was worth some $300 million, according to the committee's report.
But the company could not cash in its stake because the terms of its investment prohibited selling the stock until the end of 1999. The prices of Internet stocks were extremely volatile, and the changes in value of Rhythms shares showed up on the company's income statement, because of how Enron was accounting for the shares.
Senior executives wanted to limit those swings in value.
That is where the partnerships came in. Mr. Fastow and Mr. Glisan, who would later be appointed Enron's treasurer, arranged a series of transactions supposedly to hedge the risk in the Rhythms investment.
The complex transactions involved a number of related partnerships. But ultimately the deals required Enron to contribute both stock in Rhythms and its own stock to the partnerships. The report said Mr. Fastow indicated to other Enron executives that he had no financial interest in the transactions.
In 2000, when Enron decided to sell its Rhythms stake, the complex series of transactions had to be undone, a process known as unwinding.
During the negotiations on the unwinding, Mr. Fastow proposed that Enron pay $30 million to one partnership involved He did not reveal at that time that the partnership was secretly owned by Southampton, which had just been established.
The fact that Enron executives were profiting off this deal at the expense of their employer raised serious concerns for the committee.
"We have not seen any evidence that any of the employees, including Fastow, obtained approval from the chairman and C.E.O. under the code of conduct to participate financially in the profits of an entity doing business with Enron," the report says. "While every code violation is a matter to be taken seriously, these violations are particularly troubling."
Deregulation Problems in R. I.Employee Advocate – DukeEmployees.com – February 4, 2002
Road Island is having deregulation problems, according to the Providence Journal-Bulletin.
Competition has not materialized.
The forced deregulation caused 135,000 homes to lose service. New gas companies were not able to bill some customers for months. Some went out of business, leaving customers hanging.
Narragansett Electric is already charging very reasonable prices, and making a profit. Outsider would likely only want to come in if there is a chance to bleed the customers.
The chairman of the state's Public Utilities Commission, Elia Germani said: "I'm just very skeptical that we'll get to the point where the typical residential user is going to be sought after by an energy supplier. It's just too expensive. I don't see, frankly speaking, you're going to see competition on the residential level, no matter what you do."
Deregulation Not So Great in MarylandAssociated Press – February 4, 2002
BALTIMORE (AP) - Electricity deregulation in Maryland has failed to produce competition or new services for residential customers since it began 18 months ago, according to a report by the People's Counsel.
Until clear consumer benefits emerge, the General Assembly should consider suspending electricity choice for 1.8 million residential customers who could face higher costs without the prospects of alternative energy suppliers, said People's Counsel Michael Travieso.
Travieso also said in the report, his first examination of the state's effort to reform the electricity market, that lawmakers should consider forcing state utilities to continue providing power to customers who have not switched to another supplier once price caps begin expiring in two years.
"We don't really see benefits in a state like Maryland, which had below-average prices to start with," said Travieso, the state's advocate for residential consumers in energy matters.
"There's so much instability in that sector. There's volatility in the wholesale price market," Travieso wrote. "There are changing federal rules. Enron Corp.'s collapse and the happenings in California. All sorts of things that didn't exist in 1999 when the deregulation statute was adopted."
In the 18 months since deregulation began, just 2.6 percent of Marylanders have switched to alternative energy providers and only one company is soliciting new residential customers, the report said.
In Baltimore Gas and Electric Co.'s service area, just 14 customers have switched.
The Maryland Public Service Commission declined to comment because it had not yet seen a copy of Travieso's report.
In the summer of 2000, residential electricity customers were given the ability to switch to alternative energy providers.
But to give the market time to develop, the law gave consumers protection through price freezes, rate caps and low-income assistance.
Little competition and volatility in the market, the report says, should require state utilities to continue serving as the provider of last resort once price caps are lifted in order to protect consumers from "the whims of the market."
The caps are set to expire in July 2006 for residential customers in the Baltimore area and in July 2004 for other parts of the state.
Enron Internal Investigation ReportWashington Post – by P. Behr, D. Hilzenrath - February 3, 2002
Enron Corp. collapsed last fall because of massive failures by its management, board and outside advisers as well as self-enrichment by some employees "in a culture that appears to have encouraged pushing the limits," according to an internal report released yesterday.
The extraordinary 218-page report by a special committee of the company's board of directors -- filed yesterday with a federal bankruptcy court in New York just as senior Enron executives are preparing to testify before Congress -- found that Enron's rosy picture of financial success from the late 1990s through last summer was essentially a fiction. A handful of top managers covered up nearly $1 billion losses in the 12 months that ended last September, a period during which senior executives sold millions of dollars worth of Enron shares.
The managers created a web of complex outside partnerships that facilitated the "manipulation of Enron's financial statements" and through the partnerships "were enriched by tens of millions of dollars they never should have received," the report said.
Senior officers and the board of directors made a "fundamentally flawed" decision that ultimately led to the collapse of the company, once ranked as the nation's seventh-largest corporation.
The board, on recommendation from chairman Kenneth L. Lay and president Jeffrey Skilling, waived ethics rules in 1999 and allowed Enron's chief financial officer, Andrew Fastow, to head up private partnerships that would buy and sell assets with the company, even while Fastow kept his position at Enron. The board and top executives then neglected to monitor Fastow's activities, or even ask how much he made -- $30 million -- until last October, after media reports.
In one transaction in 2000, Fastow turned one partnership investment of $25,000 into a personal $4.5 million profit in two months. He also brought two other employees into the deal, with each making $1 million off a $5,800 investment in the same period.
The report describes Fastow as the primary creator of Enron's deceptive finances, while criticizing Lay for being inattentive. While Skilling minimized his role, his account is disputed by some other executives. Fastow's representatives would not discuss his side of the story. However, a former Enron executive in Houston who worked closely with Fastow said: "Andy was really sharp. He got approval for everything he did."
The $1 billion in overstated profits from September 2000 to September 2001 is much more than the $586 million over five years that the once high-flying energy trader reported last November after revealing accounting errors related to some of the partnerships. That announcement triggered a dive in Enron's stock price, costing shareholders and employees billions of dollar and prompting a dozen congressional and federal investigations into the Houston company's demise.
The report released yesterday does not specifically address whether Enron officials violated securities laws. It was prepared under the direction of William Powers Jr., dean of the University of Texas School of Law, who joined the board Oct. 31 after Enron first reported its third-quarter loss and appointed a special investigating committee.
"Enron engaged in transactions that had little economic substance and misstated Enron's financial results, and the disclosures Enron made to its shareholders and the public did not fully or accurately communicate relevant information," the report said. It portrayed Enron officials as determined to disclose as little as possible about the partnerships. Fastow, in particular, wanted to avoid disclosing his millions of dollars in fees from the LJM deal in the annual proxy statement, the report said.
"That impulse to avoid public exposure, coupled with the significance of the transactions for Enron's income statements and balance sheets, should have raised red flags for senior management, as well as for Enron's outside auditors and lawyers. Unfortunately, it apparently did not," the report said.
"The tragic consequences" of mishandling the partnerships "were the result of failures at many levels and by many people: a flawed idea, self-enrichment by employees, inadequately-designed controls, poor implementation, inattentive oversight, simple (and not so simple) accounting mistakes, and overreaching in a culture that appears to have encouraged pushing the limits," the report concluded. It assessed blame on many:
Enron founder and longtime chief executive Lay was "the captain of the ship," but he did not ensure that those who reported to him were performing their oversight duties properly. He acted more as a director than a member of management and bears "significant responsibility" for permitting the company's chief financial officer to profit from the partnerships. Lay resigned last month on the insistence of Enron's creditors.
Jeffrey Skilling, who had been president and was chief executive for six months before resigning last August, bears "substantial responsibility" for the failure to monitor dealings between Enron and the partnerships. He urged the board to approve the arrangement with Fastow, the report said. Other Enron employees accuse Skilling of approving a partnership transaction last March that was designed to conceal large operating losses from the board. Skilling denies that charge.
The board of directors, which waived Enron's conflict-of-interest rules to allow Fastow to run the partnerships, called LJM and Chewco, "failed . . . in its oversight duties." Though it set up procedures to monitor Fastow's compensation, board members never followed up.
Enron's outside auditor, Arthur Andersen LLP, "did not fulfill its professional responsibilities" in its auditing work, the report said. It noted that Andersen was paid $5.7 million specifically to review and approve the setup of the partnerships that led to Enron's downfall.
The company's outside law firm, Vinson & Elkins, "should have brought a stronger, more objective and more critical voice" to its review of Enron's required disclosures to investors about the convoluted partnership transactions and Fastow's role in them, the report said.
William McLucas, former head of enforcement at the Securities and Exchange Commission; his law firm, Wilmer, Cutler & Pickering; and the accounting firm Deloitte & Touche did the investigative work for the special committee.
The report said Fastow, Michael J. Kopper, a Fastow aide who made $10 million from the partnerships, and Ben F. Glisan Jr., an Enron accountant who later became the company treasurer, declined to be interviewed.
Many of those criticized in the report could not be reached for comment last night. Lay is scheduled to testify before a Senate committee tomorrow. Skilling and Fastow are supposed to appear before a House committee Thursday.
Enron lawyer Robert Bennett said the report shows "that while there is certainly criticism to go around or blame to go around . . . it's very clear that a great deal of information was not provided to the board." Bennett said Enron "did an honorable job in investigating its own problems and publicly releasing a report about them."
Neil W. Eggleston, a lawyer for Enron's outside directors, said the board "was advised by management and its outside auditor that these transactions were appropriately accounted for, and the board relied on that advice."
Andersen spokesman Charlie Leonard dismissed the report's findings, noting that the authors were "hand-chosen by the Enron board and their conclusions appear to be very self-serving."
"The report fails to make clear that all of these partnerships were business decisions conceived of and initiated by Enron and the economic consequences of those business decisions rest with Enron and not its auditors," Leonard said.
He also said Andersen failed to receive critical information from Enron on the Chewco partnership, which was responsible for 80 percent of the earnings restatement. "We attempted to speak with them, and they didn't speak with us," he said.
A spokesman for Vinson & Elkins said: "We are confident that when all the facts are known about the role we played, it will be seen that we met our professional obligation."
The committee's criticism of Enron's top management centers primarily on Skilling's failure to oversee the LJM partnership deals. Enron used the LJM partnerships as depositories for assets it wanted to get off its books, especially near ends of quarters, the report said.
While that by itself was not improper, it said, there are "substantial questions" about whether the sales were legitimate.
Five of the seven assets sold to the LJM partnerships in the second half of 1999 were quickly repurchased by Enron. The partnerships made a profit on every transaction, even when the assets involved had declined in value.
There is "some evidence" that Enron agreed to protect the partnerships against losses on three assets that it later repurchased from LJM. And, the report said, Fastow claimed that the deals generated profits for Enron of $229 million -- about 40 percent of Enron's pre-tax profit for that six-month period.
On the transactions in which Enron remained exposed to the assets' losses, "the LJM partnerships functioned as a vehicle to accommodate Enron in the management of its reported financial results," the report said.
The LJM partnerships and a related group of private investment entities called Raptor presented a deeply troubling issue to Enron , the committee's report said.
The entities were created to enter into complex financial deals with Enron designed to protect the company against a drop in the value of various Enron assets and properties. If the transactions had truly been at arm's length, they might have been justified, but Enron, through Fastow, controlled LJM and the Raptor entities. He had committed Enron's stock to guarantee repayment of LJM's outside investors.
The steep fall in Enron's stock price that began a year ago doomed that strategy. With no offsetting gains from the LJM deals, Enron faced a potential $500 million loss from its energy operations that would have had to be disclosed in March 2001. Enron hid the problem through other Raptor transactions without notifying its directors, the committee said. Finally, last October, Enron's share price had dropped so low that losses had to be disclosed.
The committee concluded that Lay did not appear to have any managerial responsibilities for the LJM partnerships. His role was the same as that of other Enron directors, who relied on company officials to make sure the LJM and Raptor transactions were properly handled.
Skilling was charged by the board to oversee the transactions, but appears to have been "almost entirely uninvolved" in their oversight. His signature is missing from many of the LJM deal documents, the committee said.
In March 2000, Enron's treasurer, Jeffrey McMahon, said he complained about the LJM deals to Skilling, warning of the serious conflict of interest resulting from Fastow's role.
Skilling told the committee that he does not remember the conversation that way and recalls only a discussion of McMahon's compensation. The committee concluded that even if Skilling's version is right, there was enough cause for him to seek the facts and act to protect Enron.
"Neither Skilling nor McMahon raised the issue with Lay or the board," the report said.
State of the EnronNew York Times – by Frank Rich - February 3, 2002
I had just finished crying over the tragic news that President Bush's mother-in-law had lost $8,000 on her Enron stock when another heartbreaking story sent me reaching once more for the Kleenex. There on the "Today" show this week was the sobbing figure of Linda Lay, Ken's wife, telling America the most rending tale of dispossession since the Yankees stole Tara from Scarlett O'Hara.
"Other than the home we live in, everything we own is for sale," said Mrs. Lay. "There's nothing left." Given that her husband has received some $200 million in compensation from Enron since 1999, and that he (as she explained) was kept in the dark about his own company's shell games, the message was clear: The Lays are the biggest victims of the entire scandal, bigger victims by far than those grandstanding employees who complain of having lost pensions in the piddling five, six or seven figures.
As if the Lays' predicament is not upsetting enough, the "Today" show left us wondering if the second-biggest victim of Enron's collapse may be the Holocaust Museum Houston, whose representative came on- screen along with various clergy and Lay offspring to testify to the family's beneficence. If the Lays are broke, you had to ask, is it only a matter of time before the Holocaust is consigned to the Houston memory hole along with the Astrodome?
I'd still be weeping as copiously as Linda Lay had I not subsequently read in The Wall Street Journal that she and her husband still owned 18 properties in Texas and Colorado, only two of which are up for sale, and that Ken Lay still owned $10 million in non-Enron stocks. Thankfully, others are lending emotional support to the couple in my stead. After ministering to Mr. Lay, Jesse Jackson likened him to Job.
Linda Lay's "Today" performance was coached by a freelancing alum of Hill & Knowlton, the wonderful p.r. folks who have made Americans fall in love with such past clients as the Tobacco Institute, the Teamsters and the Church of Scientology. Perhaps Mrs. Lay hoped she might rev up the nation's sympathy for her man, who rolls out his hear- no-evil, see-no-evil, speak-no-evil defense when testifying before Congress on Monday. But what lingers instead is her colossal arrogance. Just as Ken Lay misled his own employees about the sinking financial health of his company, imploring them to buy more stock while dumping his own, so Linda Lay takes us all for dupes, ready to be sold another bill of goods while she and hubby plot their next escape to Aspen. She didn't even identify which of the Lay sons was the target of a criminal investigation for bankruptcy fraud and embezzlement.
This is why Enron may be as much a cultural scandal as it is a business and political scandal. It is, as one friend puts it, as if a window had opened and revealed the way it all really works. What we see is a world in which insiders get to play by one set of rules — entree to Enron side partnerships that could turn minimal investments into millions overnight — while the unconnected and uninitiated pick up the bill. And it isn't necessarily illegal. All manner of creative accounting schemes took root in the corporate loophole land that was protected from reform in the 90's by such inquisitors-come- lately as Joseph Lieberman and Billy Tauzin, both recipients of accounting-industry largess. It's going to be easier for the Feds to nail mid-level scapegoats, especially those operating shredding machines, than to prove that a Ken Lay or Jeffrey Skilling had felonious intent.
Nor is this culture limited to one party or one company. Terry McAuliffe, the Democrats' chairman, has called Enron "simply outrageous" and declared that his "heart goes out to the employees and shareholders who were victimized by a web of greed and deceit." Now we learn that he parlayed a ground-floor $100,000 investment in the Bermuda-based, Beverly Hills-situated telecom company Global Crossing into $18 million and cashed out well before Global Crossing went belly-up this week, after having never turned a single yearly profit. We are to believe it is Mr. McAuliffe's business acumen that landed him on that ground floor in the first place, not the buddy network he cultivated as chief fund-raiser to his president, Bill Clinton. "If you don't like capitalism," said Mr. McAuliffe in defense of his windfall, "move to Cuba or China."
I wonder if Mr. McAuliffe's heart goes out to a schoolteacher who, having lost more than $120,000 in Global Crossing, told The Times this week, "I don't know how the management of this company did so well while small shareholders did so poorly." Gary Winnick, Global Crossing's chairman and a Clinton- McAuliffe golf partner, walked away with $730 million.
Perhaps that benighted teacher should go back to school and study the bipartisan gospel of both Mr. McAuliffe and our Treasury secretary, Paul O'Neill, who has cited Enron's swift rise and fall as a natural phenomenon "of the genius of capitalism." Under their tutelage, she would learn how Thomas White, the Bush administration's secretary of the Army, could legally exit with more than $10 million of proceeds from an Enron division that, according to his colleagues, overstated its profits by hundreds of millions on Mr. White's watch (he was vice chairman) and has since tossed overboard most of its employees.
President Bush believes that his impressive stewardship of the war will make these stories go away, and so he chose not to mention the word Enron during his State of the Union address. But the country gets the picture now, and the more Dick Cheney tries to defend the secrecy of his energy policy task force, the more he sounds as arrogant and disingenuous as Linda Lay. No less an authority than John Dean has declared of Mr. Cheney's stonewalling that "not since Richard Nixon stiffed the Congress during Watergate has a White House so openly, and arrogantly, defied Congress's investigative authority."
For all the vice president's lofty talk of the principle of executive branch confidentiality, The Times's Don Van Natta reports that the administration had no qualms about releasing an avalanche of records from the Clinton White House. Mr. Cheney has even violated his sacrosanct principle of confidentiality about his own meetings when it suits him politically. As The Los Angeles Times reported last August, the task force did depart from its pledge of secrecy once, when officials paraded a group of renewable-energy experts before White House reporters after their meeting with Mr. Cheney. How cynical can you get? That show meeting took place on the day before the energy plan was sent to President Bush. In reality, environmentalists had about as much serious access to the secret deliberations over Bush energy policy as common stockholders did to the secret partnerships at Enron.
Since we already know that Enron did have repeated meetings with the Cheney task force, what is he covering up? Logic dictates there must be some bombshells among the non-Enron names, starting with any from the vice president's former (and now imperiled) employer, Halliburton. Equally revealing are the names of those he rebuffed. This week Dianne Feinstein, the senior senator from California, revealed that her three requests to meet personally with either the president or the vice president during her state's energy crisis were denied even as the administration greeted Enron executives bearing wish lists.
Like Linda Lay, the Bush administration asks that we take its ethical purity on faith. In defending the energy task force, Ari Fleischer went so far this week as to invoke the founding fathers on behalf of clandestine administration dealings with oil company executives. "The very document that protects our liberties more than anything else, the Constitution, was, of course, drafted in total secrecy," he said. Never mind that the names of those drafters, unlike the modern-day patriots meeting with Mr. Cheney, were not kept secret. These days freedom's just another word for nothing left for Enron shareholders to lose.
POSTSCRIPT: After my previous column, Mr. Fleischer called me to say that I had been unfair to Lawrence Lindsey, the administration's chief economic adviser, when I wrote that during a Jan. 12 appearance on CNN he had not mentioned overseeing an October administration review of the impact of Enron's travails. Mr. Fleischer says that Mr. Lindsey was doing exactly that when he spoke on CNN of his staff "monitoring the energy markets." I guess I didn't notice because I was too busy wondering why Mr. Lindsey, a $50,000-a-year Enron adviser as recently as 2000, would have been connected to any such review.
Enron NepotismNew York Times – by D. Barboza, K. Eichenwald - February 3, 2002
HOUSTON, Feb. 1 — The sister and a son of Kenneth L. Lay, the former chairman and chief executive of the Enron Corporation, benefited from extensive business dealings with Enron, according to public records and interviews with family members and people close to the Lays.
The ties included Enron contracts with companies controlled by Lay family members and investments in companies in which family members had substantial holdings.
Over the last three years, Mr. Lay and his son Mark, 33, invested about $1 million in two privately held technology companies. Months after the deals, Enron signed contracts with both of them and invested in one of the companies.
In 1997, as a shareholder group was complaining about such ties, Enron acquired a company co-owned by Mark Lay that hoped to go into the business of trading paper and pulp products. Kenneth Lay knew at the time that Mark Lay and an energy company Mark controlled were targets of a federal criminal investigation of suspected bankruptcy fraud and embezzlement, Mark Lay said.
As part of the deal, Enron hired Mark Lay as an executive with a three-year contract that guaranteed him at least $1 million in pay over that period, plus options to purchase about 20,000 shares of Enron.
In addition to the dealings with Mark Lay, Enron for years has used the services of a Houston travel agency co-owned by Kenneth Lay's sister, Sharon Lay. According to public filings, the agency, Alliance Worldwide, has booked more than $10 million in revenue from Enron, representing over half of the firm's business.
Mark Lay and Sharon Lay said that nothing improper took place in any of the transactions. All required disclosures on Enron's dealings with family members were made, they said, adding that Kenneth Lay did not use his influence to award Enron contracts to companies with family ties. Enron declined to comment, and Kenneth Lay and his lawyer did not return phone calls.
No charges were brought against Mark Lay in the criminal investigation, which came to an end last year after the United States attorney in Tyler, Tex., decided not to pursue the case. Mark Lay, who left Enron last year to enter a local Baptist seminary, paid nearly $315,000 to settle a related civil case, without admitting to any wrongdoing.
"I walked into a snake's nest," the younger Mr. Lay said in an interview this week, describing the business affairs that led to the criminal investigation. "I trusted the wrong people and ended up in a transaction that everybody decided was wrong."
Legal experts said there were no clear violations of securities laws in the Lay-Enron dealings. But critics said the transactions were further examples of how top officials of Enron entangled themselves in a pattern of conflicts.
"This only underscores our concern about the self-dealing that permeates the board at Enron," said Bill Patterson, director of the office of investment at the A.F.L.-C.I.O., which estimates that its member unions' pension funds lost $1 billion in the Enron collapse.
Enron first mentioned dealings with Lay family members in documents filed with the Securities and Exchange Commission in the mid - 1990's.
Mark Lay left a low-level position at Enron in 1992, went to work at an energy trading company and then struck out on his own in 1994. After that, the records show, three successive small companies he owned or worked for did business with Enron.
One company was Bruin Interests L.L.C., a natural gas company that had a contract to store billions of cubic feet of natural gas in Enron's underground storage tanks. Bruin, which also did consulting work for Enron, traded and speculated in natural gas; Mark Lay was a co-owner.
Bruin later acquired a stake in R&C Petroleum, an East Texas energy company, after it filed for Chapter 11 bankruptcy protection in March 1994. The company was quickly restructured, but continued to pile up huge losses.
Later that year, a court-appointed trustee for R&C's creditors filed a civil suit against Bruin and several other companies, contending that Bruin and its affiliates engaged in a series of complex transactions with one another that allowed the companies to hide R&C assets and siphon money away from the bankrupt company and its creditors. They charged the R&C management team, including Mark Lay, with embezzling more than $1 million.
"They were hiding assets and stealing assets," said Cindy Scarbrough, an accountant who followed the case with her father, one of the early investors in R&C. "They had all these partnerships and shell corporations, and they would charge transportation costs that were way above normal."
Mark Lay said that he was not involved in the scheme, insisting that his partners in the R&C venture manipulated him and stole the profits. People who worked with Mark Lay said that the lawyers arrayed against R&C focused on him in the litigation because he was the son of the wealthy chairman of Enron.
"I was just 25 years old," Mr. Lay said, "and I trusted the wrong people." Like Mr. Lay, several of his associates in R&C paid to settle civil litigation without acknowledging wrongdoing.
Mr. Lay said his father was "supportive" throughout the episode; it was on his father's advice, for example, that he hired a lawyer from Vinson & Elkins, the law firm that represents Enron.
Robert Crist Vial, a lawyer for one creditor in the R&C bankruptcy case, said in-house Enron lawyers monitored some of the legal proceedings.
"I know and will swear under oath that Enron attorneys attended some of these hearings for him," Mr. Vial said. "I asked them why they were there, and they said, `Ken Lay is Enron, and this is the man's son.' "
Just months after the civil suit was settled in 1996, and while the criminal investigation remained active, Enron acquired another company owned by Mark Lay, the Paper and Print Management Corporation. Mr. Lay and his partner, another former Enron employee, hoped the company would be a pioneer in the business of trading paper and pulp products, but it had not signed up a single client when Enron acquired it.
Rather than pay a purchase price, Enron gave Mark Lay and his partners three-year, $1 million pay packages. Enron also agreed to pay a division of the Southern Company, another large energy company, $1 million to drop its investment in Paper and Print.
The deal seemed to pay off for Enron; within 18 months of acquiring Paper and Print, the division generated about $20 million in operating profit, Mark Lay said.
Paper and Print had itself been spun off from another Houston company for which Mark Lay had done consulting work: the United Media Corporation. United Media at one time did about $1 million a year in graphics business with Enron, creating graphic illustrations for executive presentations, according to people who worked at the company. Mr. Lay said that he had no role in the Enron contracts.
More recently, Mark and Kenneth Lay — like Enron — turned their attention to the Internet. In May 2000, the two men invested about $500,000 in an Internet start-up called EterniTV, a company that provides video services over the Web.
Four months later, Enron, which had ambitious plans at the time to build a broadband distribution and trading business, signed a contract to help EterniTV deliver its content.
Officials at EterniTV said there was no connection between the investment and the contract. "It's pure coincidence that we used Enron," said Jonathan Kirk, chairman and co-founder of EterniTV, which is based in San Francisco.
In December 1999, in an early round of financing, Kenneth and Mark Lay invested close to $500,000 in EC Outlook, a Houston company that develops supply chain management software, Mark Lay said. The two men then recommended the company to Enron, which invested in a later financing round in September 2000 with VenRock Associates, a venture capital fund created by the Rockefeller family.
In February 2001, EC Outlook said, it signed a licensing agreement with Enron to use its software. John C. Coffee Jr., an expert in securities law at Columbia University, said it did not appear that Enron was required to make disclosures related to the technology deals.
"It's not a classic conflict of interest," he said. "It may simply be illustrative of the kind of backscratching, incestuous relationships that occur in the business world. And it could have ripened into a conflict of interest."
Enron's disclosures of its dealings with Sharon Lay's travel agency and a consulting agreement with Mark Lay's Bruin Interests prompted shareholder complaints at a union meeting in 1997. The company defended the deals as proper.
Ms. Lay said that her company won the contract as Enron's lead travel agency through competitive bidding. "There are some who thought it was only because of my relationship to Ken that we got the contract and that's far from the truth," Ms. Lay said. "It's unfortunate that you can be put at a disadvantage because of a relationship."
For now, Mark Lay, who has worked off and on at Enron for much of the last decade, is taking a break from business. In 1995, when the R&C episode was in full bloom, he said, he paid a visit to the Second Baptist Church in Houston, where the minister was preaching about Daniel's survival in the lion's den.
"That gave me a true appreciation of what a true faith in God meant," Mr. Lay said.
Last year, after serving as president of Enron Investment Partners, a unit of Enron that invested in minority-owned businesses in the Houston area, he enrolled at the Southwestern Baptist Theological Seminary in Houston.
"I think God impressed on me that's where he wanted me," Mr. Lay said.