[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
                THE FINANCIAL COLLAPSE OF ENRON--Part 2
=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 7, 2002

                               __________

                           Serial No. 107-88

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/ 
                                 house

                               __________




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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

              Subcommittee on Oversight and Investigations

               JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida           PETER DEUTSCH, Florida
CLIFF STEARNS, Florida               BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio                TED STRICKLAND, Ohio
STEVE LARGENT, Oklahoma              DIANA DeGETTE, Colorado
RICHARD BURR, North Carolina         CHRISTOPHER JOHN, Louisiana
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
  Vice Chairman                      JOHN D. DINGELL, Michigan,
CHARLES F. BASS, New Hampshire         (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)















                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Bauer, Thomas H., Partner, Andersen LLP......................    31
    Buy, Richard B., Chief Risk Officer, Enron Corporation.......    22
    Causey, Richard A., Chief Accounting Officer, Enron 
      Corporation................................................    22
    Jaedicke, Robert, Enron Board of Directors, Chairman of Audit 
      and Compliance Committee, Enron Corporation................    93
    McMahon, Jeffrey, President and Chief Operating Officer, 
      Enron Corporation..........................................    35
    Mintz, Jordan H., Vice President and General Counsel for 
      Corporate Development, Enron Corporation...................    36
    Olson, John, Senior Vice President and Director of Research, 
      Sanders, Morris, Harris....................................    24
    Skilling, Jeffrey K., former President and CEO, Enron 
      Corporation................................................    91
    Winokur, Herbert S., Jr., Board of Directors, Chairman of the 
      Finance Committee, Enron Corporation.......................   102

                                 (iii)













                THE FINANCIAL COLLAPSE OF ENRON--Part 2

                              ----------                              


                       THURSDAY, FEBRUARY 7, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, James C. Greenwood 
(chairman) presiding.
    Members present: Representatives Greenwood, Bilirakis, 
Stearns, Gillmore, Largent, Burr, Bass, Tauzin (ex officio), 
Deutsch, Stupak, Strickland, DeGette, John, Rush, and Dingell 
(ex officio).
    Also present: Representatives Green, Markey, McCarthy, 
Waxman, and Jackson Lee.
    Staff present: Mark Paoletta, majority counsel; Tom 
DiLenge, majority counsel; Michael Geffroy, majority counsel; 
Casey Hemard, majority counsel; Jennifer Safavian, majority 
counsel; Shannon Vildostegui, majority counsel; David Cavicke, 
majority counsel; Brian McCullough, majority professional 
staff; Brendan Williams, legislative clerk; William Carty, 
legislative clerk; Peter Kielty, legislative clerk; Jonathan 
Cordone, minority counsel; Edith Holleman, minority counsel; 
Chris Knauer, minority investigator; Courtney Johnson, research 
assistant; and Jessica McNiece, staff assistant.
    Mr. Greenwood. Good morning. This hearing of the Oversight 
and Investigations Subcommittee of the House Energy and 
Commerce Committee will come to order, and the Chair recognizes 
himself for the purposes of an opening statement.
    The hearing this morning will be a painful one. We have met 
to continue our investigation into the collapse of the Enron 
Corporation. And as our investigations show and as was borne 
out by Dean Powers' testimony 2 days ago, a number of our 
witnesses today who are members of the corporate leadership 
team at Enron who must bear the greatest weight for its 
collapse.
    Four of the witnesses here today will appear only briefly. 
Mr. Fastow, Kopper, Causey and Buy will all seek the protection 
against the danger of self-incrimination guaranteed by the 
Constitution to every citizen in the Bill of Rights. The duty 
of this subcommittee is to investigate the facts of the matter 
surrounding the collapse of Enron to determine what went so 
horribly wrong that the Nation's seventh largest corporation 
had to seek protection from its creditors by filing for 
bankruptcy.
    And once we have established those facts, we have an 
obligation to determine how our financial laws and regulations 
can be improved so that in the future publicly traded companies 
faithfully and completely report their financial actions and 
their true financial health. This is the only way to ensure 
that our investor confidence is restored and that future 
investors will not suffer the fate that many thousands who 
watched with horror as the work of a lifetime was swallowed up 
and their life savings disappeared.
    The facts uncovered to date seem clear enough. Two days 
ago, we heard extensive and informative testimony from William 
Powers, Dean of the University of Texas School of Law and 
chairman of the Special Investigative Committee of Enron's 
Board of Directors, who joined the board this past October 
solely to investigate the transactions between Enron and 
various partnerships. Our own investigations into these 
transactions, along with Dean Powers' illuminating report, 
carefully detail the complex workings of these related party 
entities, as they were called.
    As the workings of these entities and associated schemes, 
such as Chewco, LJM1, LJM2, the Raptor transactions, and JEDI, 
become clearer, they also become more disturbing. In Dean 
Powers' words, ``What we have found is nothing short of 
appalling.'' Mr. Fastow, aided by a number of those witnesses 
subpoenaed here today, shared in huge fees totaling tens of 
millions of dollars to arrange and participate in bizarre 
transactions that were, at the least, imprudent; at worst, 
contrary to the very interests of the company, shareholders and 
investors they were duty bound to serve, apparently plundering 
millions at the expense of the company and its shareholders.
    In furthering these transactions, we have also learned they 
failed to follow the most basic rules of accounting. They also 
failed to adhere to any of the business tenets designed to 
avoid conflicts of interest. In putting numerous deals 
together, Mr. Fastow and his subordinates managed apparently to 
represent both sides to a transaction. The Powers report and 
the Dean's personal testimony on Tuesday could not have been 
any clearer or more firm in conclusion that these transactions 
were not designed to improve Enron's economic health; on the 
contrary, these deals magnified Enron's risks, hastening the 
day of collapse.
    Sadly, it is increasingly clear that this collapse was not 
brought about by the isolated acts of rogue employees. A 
disaster of this magnitude requires the complicity of far more 
than a few bad apples. From senior managers to corporate 
directors, to outside counsel and accountants, almost no one 
who had the power to sound the alarm, correct the situation or 
prevent this debacle did so.
    As I stated earlier, four of the individuals who are the 
center of these schemes will not testify today: Andrew Fastow, 
who was Enron's former chief financial officer; Michael Kopper, 
who was the former managing director of Enron Global Finance. 
While both of these individuals have provided some documents to 
committee investigators, they have refused to be interviewed or 
provide all of the documents in their possession. They also 
have refused to come before us this morning voluntarily. They 
have come here under subpoena.
    Rick Causey was Enron's chief accounting officer, and Rick 
Buy was Enron's chief risk officer. We received word yesterday 
that neither of these individuals will testify today. 
Fortunately, committee investigators have had the opportunity 
to interview both Mr. Causey and Mr. Buy about these matters 
over the last month.
    But reluctant witnesses will not keep us from getting at 
the truth. Again, the facts, our investigation and Dean Powers' 
report appear to confirm that Mr. Fastow essentially 
masterminded the transformation of this company into the 
derivatives trading giant it was. He devised the transactions 
that were ostensibly aimed at moving volatile holdings off 
Enron's books--deals we understand now to have been fraudulent.
    Mr. Kopper served as his chief lieutenant. He became the 
general partner of Chewco, whose mysterious dealings accounted 
for the single largest portion of Enron's financial 
restatements last November. Mr. Kopper also served as a general 
manager of Mr. Fastow's two LJM partnerships.
    Even without the testimony of Fastow, Kopper, Causey and 
Buy, we will still be able to get some important answers today. 
To this end, other witnesses today will include Enron officials 
who had dealings with Fastow and Kopper and who attempted to 
alert others in Enron's senior management about the danger 
these deals represented to the company. We will also hear from 
Tom Bauer, the Andersen audit partner who worked on the Chewco 
transactions, who is expected to describe what Enron did and 
did not disclose about this highly troubling transaction.
    Our last panel is comprised of senior Enron officers and 
directors who approved these partnerships and transactions and 
were responsible for ensuring the fairness and appropriateness 
of the transactions in question. Their role in this, for good 
or ill, also needs to be established, and we want to give them 
the opportunity to speak for themselves.
    We will hear much talk today of such things as derivatives, 
the practice of hedging and why certain transactions go on the 
books and others remain undisclosed. We will also learn more 
than any congressional committee to date on the murkiest of 
dealings Enron operatives engaged in. We have before Congress, 
for the first time, a collection of the senior Enron players 
who knew why decisions were made, why the company chose to 
pursue this ill-fated course, what the company knew about the 
risks involved and why they chose to act and not act the way 
they did. What we learn today I am confident will help this 
committee continue to construct a full and accurate picture for 
the public of what happened to cause this financial, personal 
and corporate tragedy.
    One final note: Like many Americans, I have tried to keep 
some perspective on this whole tawdry affair and to provide 
some perspective as well, but the truth is that this story of 
financial collapse and betrayal is of epic proportions. It is 
almost biblical in scope, so perhaps we need to look beyond all 
the greedy details of avarice and appetite to a larger lesson 
that all of us can share. In the 11th Chapter of the Book of 
Proverbs, the authors offer these prophetic words: ``He that 
troubleth his own house will inherit the wind. And the fool 
will be a servant to the wise in heart.'' Perhaps that is the 
true lesson of Enron's failure.
    I now recognize the ranking member of this subcommittee, 
Mr. Deutsch, the gentleman from Florida, for an opening 
statement.
    Mr. Deutsch. Thank you, Mr. Chairman. You know, our work 
here, I think all of us at this point have a sense, is much 
more important than really the specifics of this transaction, 
because we have benefited, everyone in this room, everyone in 
this country, everyone in the world, from a system of 
transparency in capital markets that has really gained 
incalculable results. And I think what we have learned, and we 
know more than we did a week ago, 2 weeks ago, is that Enron--
the system failed, Enron failed, but the system also failed, 
because stockholders, the public did not know what was going on 
in the company, and the statements did not fairly represent 
what the company was doing. And it is absolutely certain that 
that was done with intent.
    We have had a number of staff, maybe up to 20 staff people, 
trying to unravel Enron, and obviously SEC is working on this 
as well as the Justice Department. And we had a members meeting 
with staff yesterday evening where we were briefed, and one of 
the things that I asked the staff--apparently there are about 
4,000 partnerships. I am sure many of the people here could 
know the exact number, but there were 4,000 partnerships that 
Enron did. And I asked the staff to try to explain one of them 
to us of the 4,000, that maybe we can understand one and just 
understand what was there. So I am going to try--and I asked 
them for a relatively easy one, maybe the easiest.
    This is what they have described as maybe the easiest one. 
It is the LJM Rhythms transaction structure, and it started out 
as a normal transaction. Enron made an investment, an IPO, with 
Rhythms Net, an initial investment of $10 million. That 
investment then grew to a value of about $400 million Enron had 
a lockout provision in the IPO that they could not sell the 
stock, so Enron had a reason to try to lock in the stock price. 
That is a legitimate business transaction, so they were 
attempting to buy a put at the strike price. But as opposed to 
going to Goldman Sachs, what Enron did, and Mr. Fastow, what 
you did, is you set up LJM Limited Partnership to sell the put 
to Enron. And what happened was Enron capitalized LJM 
Partnerships with a value of about $200 million of Enron stock. 
As soon as that occurred, Mr. Fastow, who won't testify today, 
took a $30 million management fee as a general partner of LJM 
Partnership. At the same time, he was the chief financial 
officer or as part of the management of Enron.
    Now, what happened was, actually that partnership then set 
up a subsidiary which sold the put to Enron, but what happened 
to the stock value is it kept going down, and as it was going 
down, Enron kept putting stock into the general partnership. 
Why we believe this is illegal is that as opposed to buying a 
derivative from Goldman Sachs where it would be an arms-length 
transaction and the risk would be borne by Goldman Sachs and 
they would have a true fee between them, there was no risk for 
the partnership, because it was guaranteed by Enron stock. And 
so the $400 million in gain that was attempted to be locked in, 
that stayed on the books of Enron so anyone who wanted to try 
to understand what was going on in Enron would look at the 
books and see a $400 million gain, but, effectively, there was 
no gain.
    I mean this is a scam. This is one of 4,000 scams. It is 
one of the simpler scams, but, again, our understanding is it 
wasn't just smart, it wasn't just around the edges, it was in 
fact fraud, it was a criminal violation, and I think what we 
are learning as we learn more and more, and hopefully Enron is 
the exception in America, that the case of Enron--and I hope 
someone is going to try to defend this today, because I think I 
want to understand maybe there is another story that we haven't 
heard from our staff, maybe there is another explanation which 
we don't understand--but hopefully Enron is in fact the 
exception in corporate America, that the corporation that is 
doing this is not living on the edge, looking for the gray area 
but engaging in illegal activity, is engaged in fraudulent 
transaction.
    And one analogy that I have mentioned at at least one other 
hearing that I will mention again today, I keep reminding 
myself of the scene in the Godfather movie where Tom Hogan, who 
is the attorney for the Godfather, had a meeting with the 
Godfather, and the Godfather tells him, ``Just remember, you 
can always steal more with a briefcase than with a gun.'' And I 
think what we have here is a case where literally about $4 
billion was stolen from people, and it was stolen, 
unfortunately, from people, from real people, thousands of whom 
are suffering.
    And, again, I have read biographies of half the people on 
the panel who are going to testify and not testify today, and I 
am sure you are going to have to live with yourselves 
regardless of the consequences of what happens with all these 
investigations, but I will tell you on a personal basis, as I 
look at this, is that I hope you, in the dark night of your own 
souls, think about some of the people who in fact, throughout 
the country but particularly in the area of Texas, who 
literally lost their entire life savings and whose lives, 
effectively, in ways destroyed because of your actions. Thank 
you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the chairman of the full committee, the gentleman 
from Louisiana, Mr. Tauzin.
    Chairman Tauzin. Thank you, Chairman Greenwood. Once again, 
let me express my gratitude to you, Jim, and to you, Peter, for 
the extraordinary way in which the subcommittee had conducted 
its business and has gone about this investigation. And I would 
be remiss if I did not once again thank my good friend, Mr. 
Dingell, the ranking member of our committee, for the, again, 
extraordinary cooperation we are getting on both sides of the 
aisle in this investigation. Other committees may be proceeding 
in a partisan, political manner at looking at this matter. I 
hope Americans recognize the extraordinary way the Democrat and 
Republican investigative team and this committee and our 
members are working together to try to get to truth here. And I 
thank you again, Mr. Dingell, for that cooperation and that 
effort.
    Mr. Dingell. Thank you, Mr. Chairman.
    Chairman Tauzin. We are getting close to the bottom of this 
collapse and this mess, and I believe the solid progress this 
week will help us tremendously, as we determine not only what 
happened but what we in turn can do to assure that something 
like this doesn't happen again. We look forward this morning, 
of course, to the second portion of our hearing into the 
fraudulent transactions that brought this corporation down.
    This past Tuesday, we heard a devastating report from the 
inside of the corporation, from the chairman of Enron's own 
investigative committee. This report outlined the extraordinary 
story of self-dealing, of deception, of bogus statements, or 
irresponsible management and indeed, I believe, outright fraud. 
And I say outlined, because Dean Powers in his report did not 
have the ability, as the committee does, to compel the 
production of documents or testimony, and it was limited in 
scope. But it certainly reinforced the very troubling 
information we have been unearthing in this investigation.
    I think it is epitomized by one little line in the first 
memo that one of our witnesses, Jordan Mintz, wrote on January 
4, and I quote, ``Nicole has advised that if there is a general 
theme or guideline to follow in the preparation process of all 
these deals, it is to be as innocuous as possible in terms of 
description, detail, et cetera.''
    Despite all the complicated dealings and cross-dealings and 
self-dealing we are learning about, I still believe what we 
have before us is a simple story. It is a simple story of old-
fashioned theft and explicable acts--inexplicable acts that 
allowed the perps to get away and to destroy the company. We 
know that the senior Enron employees who controlled these 
transactions, Chewco, LJM1 and LJM2, the Raptors and so many 
others, participated in self-enrichment schemes at the expense 
of the company and the shareholders and its own employees.
    And yet these schemes could have been stopped with proper 
oversight by certain senior executives, a few of whom are with 
us today. Absent their taking action, matters could have been 
put right by Enron directors who were ultimately responsible 
for the health of the company and the interests of the 
shareholders, but that didn't happen. They allowed the CFO to 
work both sides of the negotiating table. They enabled him to 
participate in his own risky, high-return transactions but 
effectively insulated him from the risk. This assured his 
ability to take away tens of millions of dollars and ensure 
that Enron would be on even shakier ground as it ensured more 
risk and riskier proposals.
    They allowed sweetheart deals, literally, as we have 
recently discovered, to take place among senior employees, and 
they allowed a fraud to be perpetrated on the shareholders. And 
they told shareholders the company was making money that it was 
actually losing so the stock price would remain high, so senior 
officers could sell off their shares and make millions while 
the vast majority of the workers would be left holding empty 
pocketbooks. To be sure, the accountants and legal advisors 
assisted, wittingly or unwittingly, or in the sham 
transactions. And we will have the opportunity to see how we 
might resolve some of those perverse incentives that allowed 
that to happen.
    This morning, however, we have the opportunity to question 
several of the principals who could have prevented this 
collapse. They have a lot to answer for. We also have a couple 
of senior officers who attempted to alert those charged with 
policing those deals to no avail. That is a good story. We will 
hear from some good officers in the company who smelled the 
cancer growing inside and tried to do something about it. We 
will be able to explore today why they failed.
    For example, we will have before us Jordan Mintz, the 
current general counsel for Enron Global Development. He 
attempted to get then Enron President and CEO Jeff Skilling to 
sign deal approval sheets, as was required, but he couldn't get 
Mr. Skilling to sign them. We are going to ask Mr. Skilling 
today about that. We will find out why those sheets were not 
signed, why they were signed by everybody else but him. We will 
have Enron board members, and we can ask them about the 
oversight of these transactions. And, finally, we have the 
former CFO, Andrew Fastow, and former managing director of 
Enron Global Finance, Michael Kopper, who anyway you look at it 
stood at the very center of the schemes.
    Now, they may take the Fifth Amendment today, and they have 
the right to do so, and we certainly respect that, but as the 
chairman said, we have other means of getting to the bottom of 
this thing. Our investigators are doing that. We are doing it 
in a deliberative, bipartisan way, and we are going to make it 
available to the American public as we try to not only unravel 
what went wrong here, but try to make sure again that it 
doesn't happen again to any other American company, its 
employees or to those who believe in the system by which 
investors can trust information upon which they make the 
judgments when buying and selling stock in this country. We 
have got a big job to do, today is a big step.
    Mr. Chairman, again, I want to thank you for the diligent, 
extraordinary work you and your minority members are doing for 
the full committee. And, again, I want to thank Mr. Dingell for 
his extraordinary cooperation. Thank you.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you Chairman Greenwood. And, once again, allow me to express 
my gratitude to you, the ranking member, Mr. Deutsch and my friend, Mr. 
Dingell, the ranking member of the full Committee, for all your 
cooperation and effort these past two months: The hard work of the 
staff, on both sides of the aisle, is paying off.
    We are getting close to the bottom of the Enron collapse and, I 
believe, our solid progress this week will help us tremendously as we 
determine what happened, and as we then turn to what we can do to 
assure something like this doesn't happen again.
    I look forward, this morning, to this second portion of our hearing 
into the fraudulent transactions that brought this corporation down. 
This past Tuesday we heard a devastating report from the chairman of 
Enron's own investigative committee. This report outlined an 
extraordinary story of self-dealing, deception, bogus statements, 
irresponsible management and, indeed, outright fraud.
    I say outlined because Dean Powers' report did not have the 
ability, as this Committee does, to compel the production of documents 
or testimony, and it was limited in scope. But it certainly reinforced 
the very troubling information we've been unearthing in our own 
investigation.
    Despite all the complicated dealings and cross-dealing, and self-
dealing, we are learning, I believe, that what we have before us is a 
story of simple, old-fashioned theft--and the inexplicable acts, or 
lack thereof, that allowed the crooks to get away and to destroy a 
company.
    We know now that senior Enron employees who controlled these 
transactions--Chewco, LJM1, and LJM2, the Raptors, and so many others--
participated in self-enrichment schemes at the expense of the company 
and its shareholders. Yet these schemes could have been stopped with 
proper oversight by certain senior executives, a few of whom are before 
us today. Absent their taking action, matters could have been put right 
by the Enron directors, who were ultimately responsible for the health 
of the company, and the interests of the shareholders.
    But they didn't step up. They allowed the CFO to work both sides of 
the negotiating table. They enabled him to participate in his own 
risky, high-return transactions, but effectively insulated him from the 
risks. This assured his ability to take away tens of millions of 
dollars, and ensured that Enron would be on ever more shaky ground as 
it insured these risks.
    They allowed sweetheart deals--literally, as we've recently 
discovered--to take place among senior employees. And they allowed a 
fraud to be perpetrated on the shareholders. They told shareholders the 
company was making money that it was actually losing so the stock price 
would remain high, so the senior insiders could continue to make off 
with their millions, while the vast majority of workers would be left 
holding empty bankbooks.
    To be sure, the accountants and legal advisors assisted, wittingly 
and unwittingly, in the sham transactions. We'll have opportunity to 
see how we might resolve the perverse incentives that allowed this to 
happen as our investigation continues. (Our Full committee hearing 
yesterday certainly helped to shine an informed light on some of the 
questions that we must address on that front.)
    This morning, however, we have an opportunity to question several 
of the principals who could have prevented this collapse; they have a 
lot to answer for. We also have a couple of senior officers who 
attempted to alert those charged with policing these deals, to no 
avail. We'll be able to explore why they failed today.
    For example, we have before us Jordan Mintz, current General 
Counsel for Enron Global Development. He attempted to get then Enron 
President and CEO, Jeff Skilling, to sign deal approval sheets, as was 
required, but he couldn't get Skilling to sign. We can ask Mr. Skilling 
about that, who's before us today as well.
    We have Enron board members and can query them about their 
oversight of these transactions.
    And, finally, we have former CFO Andrew Fastow and former Managing 
Director of Enron Global Finance Michael Kopper, who, any way you look 
at it, stood at the very center of these schemes. And we have Richard 
A. Causey, who was chief accounting and compliance officer at the time 
of these deals, and Richard Buy, who was chief risk officer. These two 
should have known the risks the company was being subject to, and also 
had to sign off on the various transactions.
    We'd like to ask them a lot of questions, but they plan to invoke 
their Fifth Amendment rights. Even so, this hearing promises to be 
informative. I look forward to learning more about the people who 
brought this company down.

    Mr. Greenwood. I thank the chairman. Mr. Dingell?
    Mr. Dingell. Mr. Chairman, I thank you, and I want to 
reiterate the words of our chairman, Mr. Tauzin, that this is a 
bipartisan investigation, and in it we will work together to 
get to the bottom of this sorry mess. And I want to commend Mr. 
Tauzin, the chairman of the committee and also the chairman of 
the subcommittee for their labors in this and the staff, which 
has worked together splendidly to bring us to where we are 
today.
    We had hoped today that for the first time in this long 
investigation of Enron and the sorry matters associated with it 
that we would hear directly from the people who created the 
partnerships that brought Enron crashing down while they made 
millions of dollars for themselves. We had hoped to hear why 
all this had happened. We had hoped to hear what these people 
thought about the loss of jobs of thousands of employees and 
the wiping out of the savings and the retirement of thousands 
more employees, retirees and investors. Pensions funds and 
general investors in the market all have suffered because of 
deceit, misbehavior, grasping self-dealing, wrongdoing of the 
most scoundrelly and improper fashion.
    But I note with some distress that most of the key players 
are staying silent for what appears to be good reason. We know 
from the Powers report that key executives misbehaved and that 
others claim to have been clueless about the wrongdoing which 
was going on. This leaves them with the unfortunate choice as 
to whether they were incompetent or corrupt or perhaps both. 
Clearly, there is room that we can come to all of the above 
judgments. It is pretty hard to find anybody in this nasty mess 
to be a person of innocence and character.
    For years, they, at Enron, have played fast and loose with 
their numbers, with their ethics, with their public 
representations and with their fiduciary duty to the 
shareholders. As long as the earnings and the stock went up, 
everyone was happy, and no one needed to know exactly how these 
numbers were created. Enron's culture, moreover, discouraged 
anyone from raising objectives. For employees, bonuses and 
their very jobs depended on being ``team players.'' The 
infamous ``rank and yank'' system that got rid of the bottom 10 
percent of all employees every year could be, and was, 
manipulated to get rid of anyone who caused trouble. Enron's 
executive suite seemed to be the personal sandbox of a group of 
golden boys who had been clever enough to structure financial 
vehicles that would take debt and losing assets off the books 
and turn them miraculously into income. It is interesting to 
note that lawyers, accountants, officers of the company and 
others all profited from this.
    Mr. Fastow, who almost got ``yanked'' because of his 
inability to achieve real earnings in one of Enron's energy 
divisions, became the star by creating false earnings when he 
could not create real earnings. Favoritism and chaos reigned in 
his Global Finance Division, where people with inside 
information and paychecks from Enron, but their bonuses from 
LJM2, were negotiating contracts for Mr. Fastow's and Mr. 
Kopper's partnerships with other Enron employees. If the Enron 
negotiators were too tough, they sometimes got personal calls 
from Mr. Fastow. Two people who were engaged to be married were 
negotiating against each other. Picture that, if you please. 
One of them actually got a $60,000 payment from one of Mr. 
Kopper's partnerships for structuring a deal.
    Mr. Skilling, the company's president and chief executive 
officer, was warned about the problems these partnerships were 
causing in the office. He did nothing except to find another 
job for the complainant. Nor did others in positions of 
authority distinguish themselves. There were very few innocent 
parties in the board rooms and the executive suites at Enron. 
The board of directors approved these related party 
transactions, because they were ``fast and cheap.'' In other 
words, debt and assets could be moved around quickly, and Enron 
wouldn't have to pay investment bank fees.
    Then senior management and the board gave the transactions 
to the company's chief financial officer, because he would know 
where to find investors. But as a former Securities and 
Exchange Commissioner said recently, ``A CFO, of all people, 
has to have an undivided loyalty to the company.'' And we will 
inquire, as this goes forward, as to where the loyalty here 
lay. Such a structure is a recipe for disaster. And a disaster 
is clearly what followed. Enron, the seventh largest company in 
the Nation, a darling of Wall Street, a publicly-held company, 
failed, taking with it the incomes, the savings, the hopes, and 
aspirations, the dreams of its employees and its retirees.
    This committee and this Congress has a duty to find out 
what happened and to take all necessary action to correct the 
situation and to prevent the repetition of such a sorry, 
stinking mess. We may find the scandal is not only what was 
illegal. A greater scandal may very well be what was legal. Mr. 
Chairman, I thank you.
    Mr. Greenwood. And I thank the ranking member of the full 
committee. The gentleman from Florida, Mr. Bilirakis.
    Mr. Bilirakis. Thank you, Mr. Chairman. We have a vote on 
the floor. I won't take long. I do not have prepared remarks. 
And the others before me and those after me will have gone into 
many of the details, which----
    Mr. Dingell. Mr. Chairman, could I just note----
    Mr. Greenwood. Yes.
    Mr. Dingell. [continuing] if you please, one thing. There 
are a group of Enron employees here hoping for justice, looking 
to see what has transpired and watching the debates and the 
considerations in this matter by the committee with 
considerable interest, and I thank you for that. They are back 
against the wall over here.
    Mr. Greenwood. Yes. And I thank the ranking member. The 
gentleman from Florida will continue.
    Mr. Bilirakis. Well, thank you. You know, as we sit in 
these hearings, Mr. Chairman, I just wonder if particularly the 
executives of Enron and the executives of the auditors realize 
what they have done, to their stockholders, to their employees 
of Enron, to America, and to those of us, really, who have 
always believed, as Mr. Tauzin said, in the business community. 
You are really shattering the strength that you have always had 
among those of us who believe very strongly in the system. I 
can't imagine that you don't realize what you have done. And on 
the other hand, with the apparent type of mindsets many of you 
must possess to have done what you have, maybe you really don't 
realize what you have done.
    It took terrorists from other countries to tear this 
country and really the world asunder. Now we have fellow 
Americans who have accomplished something that is almost as bad 
when we take into consideration what Enrons collapse is doing 
to the stock markets, and what it is doing in the confidence 
and faith of the American people in a system of auditors, 
particularly, and in the corporate community. There is a lot of 
anger here, and I just hope that you all realize that, and you 
realize that you brought about that anger. Having said that, 
Mr. Chairman, I yield back. Thank you.
    Chairman Tauzin. I thank the gentleman. The Chair would 
like to advise the visitors and the participants here today 
that a vote is occurring on the floor of the House. Members 
have had to move over to the House floor to make that vote, but 
we will continue the process of the opening statements so we 
can get to the witnesses as rapidly as possible. And the Chair 
recognizes, at this point, the vice chairman of the full 
committee, the gentleman from North Carolina, the distinguished 
Mr. Burr.
    Mr. Burr. I thank the Chair. Mr. Chairman, Mr. Greenwood 
said earlier that this was a painful hearing. I agree totally 
with that. This is also a sick hearing. It is a sick hearing 
because of the individuals, it is a sick hearing because 
investors are sick of the lack of transparency that existed in 
the Enron books. America is sick that greed drove decisions 
with no regard for the human lives that were affected by it. 
And today's pain is magnified even greater by the decision of 
some to say nothing.
    I believe that there are individuals that will be asked to 
testify in front of this committee, and have testified in front 
of this committee, that believe by remaining silent that the 
anger will die or that we will go away or that America will 
forget. For those who have chosen that route, let me assure you 
the anger will not die, we will not go away, and America will 
not forget what has happened.
    Mr. Chairman, in its heyday, Enron ran a television ad, and 
its commercial touted their innovative corporation. I now know 
what that meant. But the Enron ad went on to show the Enron 
logo at the end, and it said, ``Why, why, why?'' You know, 
today we are here with the same logo and the same question, 
``Why, why, why?'' Mr. Chairman, I want to commend you for not 
only the subcommittee but the full committee's commitment to 
get the answers to the question, ``Why, why, why?'' I yield 
back.
    Mr. Greenwood. The Chair would gladly yield the gentleman 
as much time as he chooses. But in the absence of other members 
prepared to make opening statements now, we are going to 
suspend for at least 5 minutes until the next member is with 
us.
    [Brief recess.]
    Mr. Greenwood. The committee will come to order. The guests 
will please be seated. The Chair recognizes the gentlelady from 
Colorado for 5 minutes for an opening statement.
    Ms. DeGette. Thank you, Mr. Chairman, and I want to thank 
both you and the chairman of the full committee and Mr. Dingell 
also for these unprecedented last couple of weeks. We have 
received a crash course in corporate management, special 
purpose entities and auditing and accounting practices. This 
debacle has been a sobering revelation of the dark side of 
arrogance, greed and apparent disdain for legitimate public 
safeguards. I understand we have a number of Enron employees 
here today, and I will assure each and every one of you that we 
will get to the bottom of this, we will find what happened, and 
we will make sure it never happens again, to the best of our 
ability.
    By the time we finish this investigation, Enron may be the 
most analyzed, dissected and discussed corporation in history. 
I don't think any of us like what we have seen. I wonder about 
the mindset, for example, that allows sketchy partnerships to 
be created rife with conflicts of interest which are 
undisclosed. I have tried to conceptualize decisions that 
allowed lower-level employees, like the folks here today, to 
lose their life savings while senior executives walked away 
with millions of dollars without seemingly doing anything for 
that money. I have come to realize that there are some people 
who think they are smarter than the system and are willing to 
risk what is not theirs for personal gain. And I am shocked by 
the apparent ambivalence, at best, by a board of directors who 
somehow seems to feel that when employees and officers are 
self-dealing that these same people, the foxes guarding the 
henhouse, should somehow come to the board and independently 
give this information to the board rather than the board 
ferreting out, which I think is their fiduciary duty.
    Mr. Chairman, I have a long opening statement here, but I 
think I would rather get to what the witnesses have to say, and 
so I would ask unanimous consent to submit the whole opening 
statement for the record, and I will yield back the balance of 
my time.
    Mr. Greenwood. Without objection, the statement of the 
gentlelady in its entirety will be incorporated into the 
record.
    [The prepared statement of Hon. Diana DeGette follows:]
Prepared Statement of Hon. Diana DeGette, a Representative in Congress 
                       from the State of Colorado
    Thank you, Mr. Chairman. The last few days have been unprecedented. 
We have received a crash-course in corporate management, special 
purpose entities, and auditing and accounting practices. The Enron 
debacle has been a sobering revelation of the dark side of arrogance, 
greed, and apparent disdain for legitimate public safeguards.
    By the time we finish our investigation, Enron may be the most 
analyzed, dissected, and discussed corporation in history. I must admit 
I don't like what I've seen. I've wondered about the mind-set that 
allows sketchy partnerships to be created rife with conflicts of 
interest. I've tried to conceptualize the decisions that allowed lower-
level employees to lose their life savings while senior executives 
walked away with millions. I've come to realize that there are some 
people who think they are smarter than the system and are willing to 
risk what is not theirs for personal gain.
    Mr. Chairman, all of us have tried to comprehend this web of 
transactions, partnerships, and misinformation. The Powers Report was 
illuminating. The corporate climate of enrichment and exploitation was 
shocking. The testimony of Enron and Arthur Anderson principals in the 
past few days demonstrated little in the way of responsibility or 
remorse. We can believe one of two stories: either many key people were 
out of the loop, including the top management and board members, or, 
many people knew what was going on and turned a blind eye. Either story 
leads to the same conclusion. There were gross breaches of the board's 
fiduciary duty. A member of Enron's board of directors will tell us 
today that it is more important for us to focus on what the board knew 
when it was approving these highly problematic related-party 
transactions. I believe it is more important to ask if the board was 
acting in its true fiduciary duty by attempting to understand and 
direct the company's business.
    In the past few days we have witnessed finger-pointing, denials of 
involvement, and attempts to side-step questions. But I am waiting for 
someone who takes responsibility, someone who did know what was going 
on. In any corporation, management and corporate executives talk about 
being in charge and making the tough decisions. There must have been a 
chain of command and internal checks against abuse. Today, I would like 
to know why Jeffrey Skilling, the former CEO of Enron, failed to make 
the tough decisions required of him in order to check the conflict of 
interest of senior Enron executives.
    Thanks to the Powers Report, we know that senior management 
employed tricky transactions called SPE's to transfer risk and cover up 
liabilities. Investors, government regulators, and employees were duped 
by the very people who were supposed to shepherd resources and act with 
fiscal prudence. The management team and the board of directors were 
hired to protect their employees and to act as wise stewards for the 
company's resources, to create a sound foundation for strong future 
growth. That was their job and their fiduciary duty. Now, we have a 
glimpse of what was really going on. For Enron, business as usual was 
dirty business.
    Take, for example, the failure of Mr. Jaedicke and his audit 
committee to inquire about the nature of the SPE's and to ensure that 
Fastow was following the rules. I look forward to hearing what both Mr. 
Jaedicke and Mr. Winokur, a member of the Enron board, have to say 
about this.
    I have to say that the disappointment of this story cuts very deep. 
There are some who think this story will end in a week or a month. I 
don't think so. There are some other corporations who are standing on 
the sidelines, companies who have engaged in the same practices, 
thinking they are immune. Well, think again. This committee is not 
going away in a week or a month. We are going to demand more 
transparency. We are going to make sure that auditors do their job, and 
not take millions to rubber-stamp fraud. We are going to get to the 
bottom of this and then keep going. This bankruptcy will become a 
landmark, initiating reform and oversight that will force corporations 
to come clean and stay clean.
    I have many questions, as we all do. I am anxious to discuss all of 
this with our witnesses.
    Thank you, Mr. Chairman.

    Mr. Greenwood. The Chair recognizes, for purposes of an 
opening statement, the gentleman from Florida, Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman, and let me again 
compliment you and the staff for a very thorough job here 
investigating something as we look into more deeply gets worse 
and worse.
    When you look at the presentation that Mr. Deutsch 
provided, it is probably a little complicated to most 
Americans, but I would give the analogy, it is basically the 
analogy of the special purpose entities. Enron was putting 
money in their right pocket of approximately, let us say, $10 
and then pulling out a fictitious amount of $400 out of the 
left pocket and calling that income. Obviously, this is a case 
of failure to disclose, and it will be up to the Justice 
Department to prosecute this and to ferret out all the details.
    What we can do today, though, is to bring attention to this 
type of operation. When the Securities Act of 1993 was passed, 
the whole intent was that these individuals would provide 
disclosure. My colleagues, in capitalism, in a free market, 
unless there is a sense of compunction, a sense of 
consciousness, we can legislate till hell freezes over and we 
won't be successful. It is dependent upon men and women to put 
forth some honesty, and obviously it was not here.
    I was alarmed to read in the Wall Street Journal that the 
top executives at Enron shielded their pension benefits. It 
wiped out the retirement saving of its workers, but they had 
the gall, the unmitigated gall to have financial dealings 
where, for example, Enron Chairman Kenneth Lay used a private 
partnership to protect millions of dollars worth of executive 
pension benefits. So the more we look into this, the more 
appalling it gets.
    I imagine we are going to encounter today from Mr. Skilling 
what is called this plausible deniability regarding his role or 
knowledge of these transactions. However, I believe you will 
find this panel extremely skeptical as our investigation has 
uncovered numerous warnings, some directly reporting--that were 
reported to Mr. Skilling as to the problems with the various 
transactions. We have the Watkins memo to Ken Lay in August, 
which also mentioned former executive Cliff Baxter's 
conversation to Skilling regarding these transactions. We also 
have before us today Mr. McMahon, former treasurer, now 
president and COO of Enron, who also repeatedly raised 
concerns. And Jordan Mintz, former general counsel of Enron 
Global Finance and current general counsel of Enron Global 
Development, who also raised concerns. There are plenty of 
flags. People were just denying the facts. Arthur Andersen, in 
its role, appeared to have acquiesced in these dealings, 
despite concerns raised internally in a February 2001 memo.
    And, again, I would like to quote, as the chairman has, 
both the chairman of the full committee and the chairman of the 
Oversight Committee, from the Powers report that these 
transaction consisted of, ``a flawed idea, self-enrichment by 
employees, inadequately designed controls, poor implementation, 
inattentive oversight.'' We are indeed uncovering more and more 
information. Unfortunately, many of the folks today will use 
the Fifth Amendment, which they are entitled to do. But that 
leaves the general impression that something occurred here 
which was wrong, and they are afraid to incriminate themselves.
    I would close, Mr. Chairman, by saying that something is 
going on here in space and time and that we, as Members of 
Congress, have a fiduciary responsibility to ferret out the 
details and facts for the American people, and it is an awesome 
responsibility. And I yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes, for an opening statement, the gentleman from 
Louisiana, Mr. John.
    Mr. John. Thank you, Mr. Chairman. On Tuesday, this 
committee had an opportunity to review and discuss the Powers 
report. It provided the subcommittee with at least a little 
glimpse into the questionable and, more likely, criminal 
activities that contributed to Enron's financial collapse. 
Yesterday, the full committee had an opportunity to hear from 
experts in the auditing and accounting field about what we can 
learn from the lessons of Enron. Today, however, is the main 
event. While it appears that we will learn from the first three 
panels, at most, their ability to recite the Fifth Amendment, I 
am hoping that the remaining witnesses can shed a little more 
light in the numerous partnerships and transactions and 
businesses with Enron.
    It is important to remember, from a committee standpoint, 
that we, the members, do not sit as prosecutors, judges, or 
jury members in determining the guilt or innocence of our 
panelists. I have confidence in the ability of the U.S. 
Department of Justice to pursue justice of what clearly to me 
appears to be securities fraud, insider trading and obstruction 
of justice.
    The illegal and unethical conduct of Enron officers and 
managers is an important component in our congressional 
investigation, but it is the legal loopholes and business 
practices of companies exemplified by Enron's use of, quote, 
``aggressive accounting,'' that I feel is our primary charge of 
this subcommittee. We cannot protect against every bad actor in 
corporate America who decides to willfully break the law, 
although we can make sure that the tools are available to 
regulators so that we can catch them. We can, however, make 
sure that shareholders and investors are not misled by 
inadequate disclosure, conflicts of interests or may I quote 
from the Powers report, ``walking conflicts of interest,'' and 
a lack of independence in the performance of auditing 
functions.
    Mr. Chairman, I believe today we have the architects of 
Enron's house of cards, and I am eager to hear from Mr. 
Skilling and others, their views and their roles in the 
eventual collapse. The Powers report concluded that many of the 
partnerships created by the first three witnesses were, from 
the very beginning, fraudulently created, because they 
transferred no risk and were designed for the very sole purpose 
of shifting debts and liabilities off balance sheets. Worse 
still, these related party transactions allowed Mr. Fastow and 
others to enrich themselves with extraordinary compensation 
packages which hardly seem justified since these are the very 
transactions that created the chain reaction that destroyed the 
company, the seventh largest company and the largest bankruptcy 
in the history of America.
    I do not wish to paint all of the witnesses with one and 
the same broad brush. Mr. Mintz, for example, had the good 
sense to recognize the conflict of interest by Enron employees 
serving in positions in both the company of Enron and the 
partnerships, one of which was LJM, and made efforts many times 
to raise these concerns. Perhaps he can explain, and I am eager 
to hear from him, to the subcommittee why so few others appear 
to have recognized or expressed the same concerns.
    Mr. Chairman, no one on this committee wants to see a 
repeat of the events that brought down Enron. Hindsight often 
gives us 20/20 vision in many things that we do, and our 
challenge is to use these lessons that we will learn to make 
sure that there is no repeat performance in corporate America. 
Our efforts will not restore the retirement savings of Enron 
employees who watched their 401(k) plans evaporate, nor will it 
return investors' billions of dollars in equity that 
disappeared in a very, very few short months. However, with 
your continued leadership, Mr. Chairman, and the chairman of 
our subcommittees, we can get to the bottom of this mess and 
take legislative action so that this will never happen again.
    With that, I yield back the balance of my time so that we 
can hear from the people the Powers Report identifies as 
largely responsible for this American corporate disaster. Thank 
you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes, for an opening statement, the gentleman from New 
Hampshire, Mr. Bass.
    Mr. Bass. Thank you, Mr. Chairman, and I will be brief. We 
have had a series of hearings on this issue, and we have become 
educated. The more we learn, the more nauseating the whole 
story becomes. There are issues of insider trading, 
nondisclosure, possible obstruction of justice, irregular 
accounting practices, the list goes on.
    A number of the witnesses will take the Fifth Amendment 
today, which is understandable. One, Mr. Skilling, will 
testify, I suspect, as he said in a December that what happened 
to Enron was a tragedy but one for which--but not one for which 
he was responsible. He said in his interview, quote, ``I didn't 
do anything wrong.''
    Well, I don't know whether ethics or morality or cruelty or 
inhumanity are really right or wrong; I think they are wrong. I 
hope that after we beyond the question of who wrote what memo 
to who, who put whose signature on a memo, the complexity of 
all the transactions are finally bared and the horrible truth 
becomes evident that we really ask as a committee how much 
illegality occurred, firstly, and, second, what we can do as a 
full committee to make sure that this tragedy perpetrated by 
these business cowboys never happens again.
    I appreciate this hearing process. I think it is going to 
be long, difficult, but ultimately I think the investment world 
will be better off and the capital markets will be more 
reliable and honest as a result of our efforts today and the 
days to come. I yield back.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes, for an opening statement, the gentleman from 
Illinois, Mr. Rush.
    Mr. Rush. Thank you, Mr. Chairman, for what has been the 
third hearing this week on this particular matter. Before I 
begin, I want to call your attention to the attention of the 
members of this committee that present in the room today we 
have one of the world's most outstanding citizens, a man who I 
have known for many, many years, for decades even, a man who 
has played in pivotal role in my life on more than one 
occasion, a man who is now fighting for the Enron employees, 
the Reverend Jesse L. Jackson. So would you please acknowledge 
him, Mr. Chairman, that Reverend Jackson is in the room with us 
today.
    Mr. Greenwood. The Chair welcomes the gentleman, Mr. 
Jackson, to our proceedings this morning.
    Mr. Rush. Mr. Chairman, I want to thank you for holding 
this hearing, and I intend to be brief. I understand those of 
you who have come under the most public scrutiny intend to 
avoid questioning this morning. And for those of you who refuse 
to testify and know your guilt, I ask you, was it worth it? Was 
the selling of your morals worth it? Was the selling of your 
souls worth it?
    In my State alone, the State of Illinois, State pension 
plans lost a total of $34 million out of a total $1.4 billion 
nationwide that was lost. This was money, hard-earned money set 
aside to provide secure retirement for thousands of citizens 
who have dedicated their lives to public service. These are the 
teachers who help raise our children and educate our children. 
These are the police officers who patrol our streets and 
protect our families and our homes. These are public servants 
who keep our cities and our towns and our villages running on a 
day-to-day basis.
    The money--these pensions were supposed to fulfill these 
workers' hopes and their dreams and provide a secure retirement 
for them. This morning, millions of dreams have been deferred, 
if not lost. This very morning, millions of dreams have been 
denied. Parents are anguishing over how they will afford their 
children's education. Elderly workers are being forced to put 
off retirement indefinitely. And America's sense of financial 
security has been shaken at its very core.
    Mr. Chairman, more than having these men explain their 
actions to the Nation, more than making sure that the guilty 
are punished, this hearing is about returning the financial 
stability and sense of economic interest in security to our 
Nation. Just as the World Trade Center bombers have shaken the 
sense of personal security for millions of Americans, the Enron 
catastrophe has left our public without a sense of economic 
security. At the center of this economic meltdown, we find a 
handful of economic terrorists. But unlike most terrorists who 
base their actions on twisted and perverse ideas of justice and 
righteousness, the economic terrorists at Enron had one cause: 
selfishness and greed.
    So as we begin today's hearing, I ask each of you who 
profited from the downfall of thousands whether it was worth 
it. I suspect that some of you may answer yes; however, I 
sincerely hope that you live long enough to regret that 
particular sentiment. Thank you, Mr. Chairman, and I yield back 
the balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes, for purposes of an opening statement, the gentleman 
from Oklahoma, Mr. Largent.
    Mr. Largent. Thank you, Mr. Chairman. I too will be brief 
in an effort to move this hearing forward and try to bring a 
little perspective and balance to my comments here.
    Mr. Chairman, as you know, last night we prepared for this 
subcommittee hearing. Our subcommittee and staff met about six 
o'clock last night, and I was particularly impressed by some 
comments that you made that I felt like really brought some 
focus for the purpose and intention of this hearing. It is not 
a time for us demagogue, although there is a lot of that going 
on, or even to prosecute. That is up to the Justice Department 
to figure out what laws currently on the books that have been 
broken, and I am sure that they will do a competent job of 
that.
    But, rather, the purpose for this hearing is to find out 
the laws that were not broken but the things that were done in 
this Enron debacle that were legal but perhaps shouldn't be. 
And I think that is the purpose of this hearing, and I look 
forward to hearing the testimony of the folks that are on the 
panels today so that we can find out and help prevent, perhaps, 
through the passage of additional laws that are not on the 
books but should be. And so, Mr. Chairman, with that, I thank 
you for holding this hearing, and I look forward to the 
testimony and yield back my time.
    Mr. Greenwood. The chairman thanks the gentleman and agrees 
with him and recognizes, for an opening statement, the 
gentleman from Michigan, Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman. Over the past several 
weeks, we have held numerous hearings to explore this house of 
cards that was once the might Enron Corporation. Yesterday, we 
heard from a panel of experts who walked through the accounting 
principles, the legal, ethical and moral principles that should 
be adhered to in corporate America. In the past, we have heard 
from Andersen employees about the shredding of documents and 
the destruction of e-mails that went on in an effort, I am 
sure, to cover up this whole mess. We have heard from Mr. 
Powers about his commission is finding and the actions of 
several Enron employees to set up special purpose entities to 
assist in cooking the books at Enron. We have heard and read 
about the totality lax oversight by Mr. Lay, Mr. Skilling and 
other executives on Enron's Board of Directors.
    Enron's Board of Directors gave dangerous flexibility to 
Mr. Fastow in allowing him to establish several of these 
special purpose entities. They, the board of directors, 
supposedly put in a number of checks and balances in place when 
they waived their conflict of interest provisions, but thus far 
all the checks we have seen, tens of millions of dollars worth, 
went into bank accounts of Mr. Fastow and others. There 
certainly were, there certainly were no checks or balances in 
the equations and no follow-up to make sure the company wasn't 
being bilked.
    We have learned new terms like aggressive accounting, which 
in this case translates, I believe, into making individuals 
richer while we sticking it to the shareholders and the 
workers. I am glad to see some of the Enron workers here today 
who gave so much and lost so much. This new aggressive 
accounting I believe is the result of a new cavalier attitude 
in corporate America since the passage of the Securities 
Litigation Reform Act of 1995, or, as some of us refer to it, 
the Securities Rip-Off Act. As I look at all that has happened, 
this new law, what it does, it insulates corporations from 
legal actions by putting up roadblocks so employees and 
stockholders cannot take legal actions when the books have been 
stacked against them.
    Mr. Chairman, it will be difficult, if not impossible, for 
Enron to emerge as a credible company from bankruptcy without a 
comprehensive and complete purging of all Enron executives and 
board members who were at the helm during this whole debacle. 
They must be held accountable, and I hope the shareholders and 
the employees of Enron will do themselves a favor and get a 
true board of directors and new management team.
    Mr. Chairman, I could go on with my statement, but I am 
going to yield back the balance of my time, because I am really 
interested to see who is going to testify, who is not going to 
and look forward to the questioning and cross examination. I 
appreciate your leadership in this whole matter. We have spent 
a lot of time together the last couple of weeks and I look 
forward to continuing on this Enron mess. Thank you.
    Mr. Greenwood. The Chair thanks the gentleman, and we are 
almost there. The Chair recognizes the gentleman from Ohio, Mr. 
Strickland, for an opening statement.
    Mr. Strickland. Thank you, Mr. Chairman. Today, we are 
taking an in-depth look at the corporate thievery and greed 
that resulted in the collapse of Enron. Thousands of people 
lost their jobs and their retirement savings. Investors and 
shareholders lost billions in debt and equity. Plans and dreams 
of these people have gone up in smoke. The American people have 
lost faith in the stock market, because they don't know if they 
can believe what publicly held companies and their auditors are 
telling them about profits and losses. Enron's earnings weren't 
real, because they used financing and accounting slights of 
hand so complex that even sophisticated analysts could not read 
them.
    Some of the people most responsible for this disaster are 
before us today and will take the Fifth Amendment. They are the 
ones who violated their fiduciary duty to Enron's shareholders, 
but apparently they are seeking even more. According to the 
press yesterday, Mr. Causey and Mr. Buy are currently 
negotiating their severance packages from Enron, as is Kenneth 
Lay, the former president. Let us review for a moment how some 
of these people have already benefited from their Enron stock 
in addition to their most generous salaries.
    Mr. Causey, who was the chief accounting officer, has 
cashed out to the tune of $13.3 million. Mr. Buy received over 
$7 million in proceeds in 2001 alone. Kenneth Lay, Enron's 
former chairman and chief executive officer, made $18 million 
in salary and compensation in 2000 and received over $100 
million in stock sale proceeds. He promised last year that he 
would give up his $60.6 million severance package, but now he 
wants a severance package also it seems. Mr. Skilling, who took 
out $67 million in profits, plus his generous salary, got a 
consulting contract with Enron when he left. We will want to 
know more about his severance package today. Mr. Fastow got 
only $30 million in stock proceeds from Enron, but he took 
another $30 million out with his side deals. Mr. Kopper got at 
least $10 million.
    Over 4,000 former Enron employees who lost their jobs in 
the Enron debacle were given, for the most part, $4,500 in 
severance pay to get through a transition period. Some of them 
are in dire straits, as are a number of people with pension 
plans heavily invested in Enron stock. I think it would be 
appropriate to provide Mr. Lay, Mr. Causey and Mr. Buy each 
with $4,500 in severance pay to help them through a transition 
period. Any additional claims they may have should be part of 
the thousands of claims of the uninsured creditors that the 
bankruptcy court will handle. One cent on the dollar might be 
an appropriate recovery.
    Whether the actions we have uncovered are illegal or legal 
will be determined, but we do know they were certainly 
unethical and immoral. Now, perhaps that is not important to 
the Enron business executives who have tried to walk away 
embarrassed but rich, but it is important to the American 
people, and it must be important to those of us who were 
elected to represent the people. Consequently, we must do 
everything, Mr. Chairman, to see that whatever is necessary is 
done to see that such happenings never happen again. Thank you.
    Mr. Greenwood. The Chair thanks the gentleman and now calls 
forward our first witness. Our first witness is Mr. Andrew S. 
Fastow, former chief financial officer, Enron Corporation. Mr. 
Fastow is here, pursuant to a subpoena served earlier this 
week. Mr. Fastow, if you will please be seated at the table.
    Mr. Fastow, you are aware that the committee is holding an 
investigative hearing and when doing so has had the practice of 
taking testimony under oath. Do you have any objection to 
testifying under oath?
    Mr. Fastow. No, sir, I do not.
    Mr. Greenwood. Thank you. The Chair then also advises you 
that under the rules of the House and rules of the committee, 
you are entitled to be advised by counsel. Do you desire to be 
advised by counsel during your testimony today?
    Mr. Fastow. Yes, Mr. Chairman. My counsel, Mr. John Keker, 
is seated next to me.
    Mr. Greenwood. Okay. For the record, could you spell Mr. 
Keker's name for us.
    Mr. Keker. K-E-K-E-R.
    Mr. Greenwood. Thank you, Mr. Keker. In that case, would 
you please rise and raise your right hand, and I will swear you 
in.
    [Witness sworn.]
    Mr. Greenwood. In that case, you are now under oath, and 
you may give a 5-minute summary of your written statement. Do 
you have an opening statement, sir?
    Mr. Fastow. No, sir; I do not.
    Mr. Greenwood. Okay. In that case, the Chair will then 
recognize himself for questions to the witness. Mr. Fastow, you 
were the CFO of a Fortune 10 company, a full-time, to be sure. 
Yet somehow you managed to also run to private equity funds, 
using your insider status at Enron to attract investors and 
enrich yourself by tens of millions of dollars by doing deals, 
and highly questionable deals at that, with your own company. 
You also, we have learned, used your power, position and 
influence to threaten and pressure Enron employees in an 
attempt to obtain favorable terms for your private 
partnerships.
    The question, Mr. Fastow, is how could you believe that 
your actions were in any way consistent with your fiduciary 
duties to Enron and its shareholders or with common-sense 
notions of corporate ethics and propriety? How do you answer, 
sir.
    Mr. Fastow. Mr. Chairman, I would like to answer the 
committee's questions, but on the advice of my counsel, I 
respectfully decline to answer the question based on the 
protection afforded me under the Constitution of the United 
States.
    Mr. Greenwood. Let me be clear, Mr. Fastow. Are you 
refusing to answer the question on the basis of the protections 
afforded to you under the Fifth Amendment of the United States 
Constitution?
    Mr. Fastow. Again, Mr. Chairman, on the advice of my 
counsel, I respectfully decline to answer the questions based 
on the protection afforded me under the United States 
Constitution.
    Mr. Greenwood. And will you invoke your Fifth Amendment 
rights in response to all of our questions here today?
    Mr. Fastow. Yes, sir, Mr. Chairman.
    Mr. Greenwood. Okay. We regret that, but it is your right. 
It is therefore the Chair's intention to dismiss the witness, 
but the committee, of course, reserves all of its rights to 
recall the witness at any time. Mr. Deutsch, do you agree with 
our decision?
    Mr. Deutsch. Mr. Chairman, normally I would very easily, 
but I think that this might be the only time that we are going 
to have any chance in the public setting to even attempt to ask 
Mr. Fastow questions. And I know he is intending to invoke his 
Fifth Amendment prerogative, which I take very seriously, but 
at the same time, within the constraints that he has, and he 
has that right, I would ask him if there is any area that he 
feels he can discuss, any questions within the area of his--so 
our understanding--I mean I just got rebriefed by our staff on 
the Rhythms transactions, and still--and there will be some 
people who testify, but obviously this is a transaction that 
you set up, that you were the general partner of and the CFO at 
the time.
    Mr. Greenwood. The Chair must note that we would all, of 
course, like to question Mr. Fastow, but we have had our 
discussions with his attorney. It was clear to Mr. Fastow and 
to his attorney that should he invoke his Fifth Amendment to 
which he is entitled, we would dismiss him and we have not had 
this conversation up until this moment. So the decision of the 
chairman is firm, and Mr. Fastow, you are dismissed, and you 
may be on your way.
    Mr. Fastow. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair then would call forward our next 
witness, Mr. Michael J. Kopper, former managing director of 
Enron Global Finance. Good morning, Mr. Kopper.
    Mr. Kopper. Good morning, Mr. Chairman.
    Mr. Greenwood. Mr. Kopper, do you have an opening 
statement?
    Mr. Kopper. No, I do not.
    Mr. Greenwood. Okay. You are aware, Mr. Kopper, that this 
committee is holding an investigative hearing, and it is a 
custom and the practice of this committee when holding an 
investigative hearing to take our testimony under oath. Do you 
have any objection to testifying this morning under oath?
    Mr. Kopper. No, I do not.
    Mr. Greenwood. Okay. The Chair should then advise you that 
under the rules of the House and the rules of the committee, 
you are entitled to be advised by counsel. Do you desire to be 
advised by counsel during your testimony today?
    Mr. Kopper. I do, and I am.
    Mr. Greenwood. And would you identify your counsel, please?
    Mr. Kopper. I have Mr. Wallace Timmeny and David Howard 
here as my representatives.
    Mr. Greenwood. And could you, Mr. Kopper, please pull your 
microphone a little closer----
    Mr. Kopper. Yes.
    Mr. Greenwood. [continuing] and make sure we can hear you? 
And if your attorneys would spell their last names for the 
record.
    Mr. Timmeny. Timmeny is T-I-M-M-E-N-Y.
    Mr. Howard. And Howard is H-O-W-A-R-D.
    Mr. Greenwood. I thank the gentlemen. In that case, Mr. 
Kopper, would you rise and raise your right hand, and I will 
swear you in.
    [Witness sworn.]
    Mr. Greenwood. You have already indicated, Mr. Kopper, that 
you did not come with an opening statement, and so the Chair 
will then recognize himself for questions.
    Mr. Kopper, according to the committee's investigation and 
the Powers report, you violated Enron's code of conduct by 
investing in partnerships doing business with Enron without 
board approval and corrupting others at Enron to join you in 
your dubious enterprises. You enriched yourself at Enron's 
expense to the tune of more than $10 million, and you used your 
power, position and influence within Enron to threaten and 
pressure Enron employees in an attempt to obtain favorable 
terms for your private partnerships. Can you, sitting her under 
oath, truly deny any of this?
    Mr. Kopper. Mr. Chairman, I respectfully decline to answer 
the question based on my right under the Fifth Amendment to the 
United States Constitution not to be a witness against myself.
    Mr. Greenwood. Let me be clear, Mr. Kopper. Are you 
refusing to answer the question on the basis of the protections 
afforded to you under the Fifth Amendment to the U.S. 
Constitution?
    Mr. Kopper. Yes, I am.
    Mr. Greenwood. Will you invoke your Fifth Amendment rights 
in response to all questions here today?
    Mr. Kopper. Yes, I will.
    Mr. Greenwood. It is therefore the Chair's intention to 
dismiss this witness, but the committee, of course, reserves 
all of its rights to recall the witness at any time. Mr. 
Deutsch, would you concur in this?
    Mr. Deutsch. Yes.
    Mr. Greenwood. Okay. Mr. Kopper, you are dismissed.
    Mr. Kopper. Thank you, Mr. Chairman.
    Mr. Greenwood. And the Chair calls forward Mr. Richard B. 
Buy, chief risk officer of Enron Corporation, and Mr. Richard 
A. Causey, chief accounting officer, Enron Corporation. Good 
morning, Mr. Buy and Mr. Causey. You gentlemen are aware, I 
believe, that the committee is holding an investigative 
hearing, and as you have heard, when doing so we have the 
practice of taking testimony under oath. Do either of you have 
any objection to testifying under oath?
    Mr. Causey. No, sir.
    Mr. Buy. No, I don't.
    Mr. Greenwood. Hearing no such response, the Chair then 
advises you that under the rules of the House and the rules of 
the committee, you are entitled to be advised by counsel. Do 
you desire to be advised by counsel during your testimony?
    Mr. Causey. I do.
    Mr. Greenwood. Mr. Causey, would you identify your 
attorney?
    Mr. Causey. Yes, Mr. Reed Weingarten.
    Mr. Greenwood. Mr. Weingarten, would you spell your last 
name for us, please?
    Mr. Weingarten. W-E-I-N-G-A-R-T-E-N.
    Mr. Greenwood. Mr. Buy, do you choose to be represented by 
attorney?
    Mr. Buy. Yes, I do.
    Mr. Greenwood. And can you identify your attorney for us, 
please?
    Mr. Buy. Mr. J.C. Nickens.
    Mr. Greenwood. Mr. Nickens, would you spell your last name, 
please?
    Mr. Nickens. Yes. That is N-I-C-K-E-N-S.
    Mr. Greenwood. Okay. In that case, gentlemen, if you would 
both rise, I will administer the oath.
    [Witnesses sworn.]
    Mr. Greenwood. Thank you. You may be seated. You are both 
under oath. Mr. Buy, do you have an opening statement?
    Mr. Buy. No, I don't.
    Mr. Greenwood. Mr. Causey, do you have an opening 
statement?
    Mr. Causey. Yes, sir; I do.
    Mr. Greenwood. Okay. The Chair recognizes the gentleman, 
Mr. Causey, for 5 minutes for an opening statement.

TESTIMONY OF RICHARD A. CAUSEY, CHIEF ACCOUNTING OFFICER, ENRON 
  CORPORATION; AND RICHARD B. BUY, CHIEF RISK OFFICER, ENRON 
                          CORPORATION

    Mr. Causey. Mr. Chairman, members of the committee, I am 
appearing here today voluntarily at the request of the 
committee. As you may be aware, a few days ago I was advised by 
my Enron-provided counsel that he could no longer represent me. 
I immediately undertook a search for new counsel, and within 
the past 24 hours I have retained the services of Steptoe, 
Johnson, Collier & Shannon. My new counsel has been unable to 
provide me meaningful advice during this brief period.
    I, therefore, respectfully requested a brief delay. I was 
informed by the committee staff that notwithstanding these 
facts my presence today was desired by the committee. Out of 
respect for the committee, I have voluntarily appeared. 
However, without the benefit of meaningful opportunity to 
consult with counsel, I am respectfully unable to answer 
questions from the committee at this time. Therefore, on the 
advice of counsel, I will respectfully decline to answer 
questions by the committee. Thank you.
    Mr. Greenwood. I thank the gentleman for your statement. 
The chairman and the committee are disappointed that we will 
not be able to receive your testimony today. We know that you 
had prepared extensively for interviews with our staff, and we 
thought that would have sufficed. The facts have not changed, 
but we do understand the change in your legal representation 
and pleased that you are here as well.
    I am going to ask a question to both of you gentlemen. Both 
of you gentlemen were specifically charged by the board of 
directors with the responsibility to ensure that the 
transactions between Enron and LJM Partnerships were truly 
arms-length transactions, beneficial to Enron and its 
shareholders. We now know that many of those transactions were 
anything but beneficial to Enron, and in fact contributed 
mightily to Enron's dramatic collapse. Do you believe, 
gentlemen, by your actions or your inactions, you failed 
Enron's employees and shareholders? Mr. Causey, would you 
respond to that question?
    Mr. Causey. Mr. Chairman, on the advice of counsel, I will 
respectfully decline to answer that question.
    Mr. Greenwood. Let me be clear, Mr. Causey. Are you 
refusing to answer the question on the basis of the protections 
afforded to you under the Fifth Amendment to the U.S. 
Constitution?
    Mr. Causey. Yes, sir, I am.
    Mr. Greenwood. Will you invoke your Fifth Amendment rights 
in response to all questions here today, Mr. Causey?
    Mr. Causey. Yes, sir, I will.
    Mr. Greenwood. Okay. Mr. Buy, how do you respond to the 
question?
    Mr. Buy. For the reasons outlined in a letter submitted to 
the committee last night and on the advice of counsel, I 
respectfully decline to answer any questions.
    Mr. Greenwood. Mr. Buy, let me be clear. Are you refusing 
to answer the question on the basis of the protections afforded 
to you under the Fifth Amendment to the U.S. Constitution?
    Mr. Buy. Yes.
    Mr. Greenwood. And will you invoke your Fifth Amendment 
rights in response to all of our questions here today, Mr. Buy?
    Mr. Buy. Yes, I will.
    Mr. Greenwood. In that case, it is the chairman's intention 
to dismiss both of these witnesses, but the committee, of 
course, reserve all of its rights to recall the witnesses at 
any time. Mr. Deutsch, do you concur in this decision?
    Mr. Deutsch. Yes.
    Mr. Greenwood. Gentlemen you are, and your attorneys are, 
excused.
    The Chair then would call forward Mr. John Olson, of 
Sanders, Morris and Harris, senior vice president and director 
of Research; Mr. Thomas H. Bauer, partner at Andersen LLP; Mr. 
Jeffrey McMahon, president and chief operating officer, Enron 
Corporation; Mr. Jordan Mintz, vice president and general 
counsel for Corporate Development.
    Good morning, gentlemen. Gentlemen, I believe that you are 
aware that this committee is holding an investigative hearing, 
and that it is the practice of this committee when holding an 
investigative hearing to take testimony under oath. Do any of 
you object to providing your testimony under oath?
    Seeing no such objection, the Chair would then advise you 
that under the rules of the House and the rules of this 
committee, you are entitled to be advised by counsel. Do you 
desire to be advised by counsel during your testimony. Mr. 
Olson?
    Mr. Olson. No.
    Mr. Greenwood. Mr. Bauer?
    Mr. Bauer. Yes, I do.
    Mr. Greenwood. Would you identify your attorney, sir?
    Mr. Bauer. Mr. Scott Schreiber.
    Mr. Greenwood. Would you spell his last name, please?
    Mr. Schreiber. S-C-H-R-E-I-B-E-R.
    Mr. Greenwood. Thank you. Mr. McMahon?
    Mr. McMahon. Yes, I do. And my counsel is Mr. Levy, L-E-V-
Y.
    Mr. Greenwood. Thank you, sir. Mr. Mintz?
    Mr. Mintz. Mr. Chairman, also Mr. Levy is representing me.
    Mr. Greenwood. Okay. In that case, gentlemen, if you would 
rise, raise your right hands, I will swear you in.
    [Witnesses sworn.]
    Mr. Greenwood. You are now under oath. The Chair would 
advise the witnesses and the audience that two votes have just 
been called on the floor of the House, and we know you have 
waited a good while already, but it will take at least 25 
minutes for us to get over and make these two votes and come 
back. We will adjourn for 20 minutes and see if we cannot 
resume then. This hearing is suspended.
    [Brief recess.]
    Mr. Greenwood. The committee will reconvene. Again, we 
thank the witnesses and apologize for the break there. There 
will not be any more for the afternoon, so we won't have those 
interruptions. Mr. Olson, you are recognized for 5 minutes for 
your opening statement, sir.

TESTIMONY OF JOHN OLSON, SENIOR VICE PRESIDENT AND DIRECTOR OF 
 RESEARCH, SANDERS, MORRIS, HARRIS; THOMAS H. BAUER, PARTNER, 
 ANDERSEN LLP; JEFFREY MCMAHON, PRESIDENT AND CHIEF OPERATING 
OFFICER, ENRON CORPORATION; AND JORDAN H. MINTZ, VICE PRESIDENT 
     AND GENERAL COUNSEL FOR CORPORATE DEVELOPMENT, ENRON 
                          CORPORATION

    Mr. Olson. Thank you very much, Mr. Chairman, members of 
the committee. I am a securities analyst from Houston, Texas, 
and I have been covering Enron since before it was Enron. I 
have had the distinction, I guess, of not having recommended it 
for the last 10 plus years until the very end when the company 
was sinking fast.
    Thank you for the opportunity to discuss some very, very 
important credibility issues for Wall Street and the American 
public, which have been created by the collapse of Enron. I 
will be mercifully brief. There has been tremendous collateral 
damage in the capital markets since Enron went down 2 months 
ago. It is still ongoing. You can help bring it to a stop. Your 
own confidence in the investing process must have already been 
sorely tested after all that you have heard. I hope my comments 
can provide a securities analyst perspective on what went wrong 
and how we could fix it. With the help, perhaps, of 20/20 
hindsight, let me try to answer.
    Enron was good at some things, but it was great at gaming 
the system. It gamed us on Wall Street, it may have gamed its 
auditors and outside counsel, but it also seems some insiders 
were gaming Enron proper and they were gaming each other. The 
Wall Street gaming was principally from the partnerships or the 
special purpose entities. They involved marketing marginal 
assets with marginal accounting and marginal financial 
structures. All of these involved bankers, rating agencies and 
private placement people.
    What they did not involve, I might point out, were stock 
analysts like myself. We never saw or were never even aware of 
these deals. They were considered confidential or privileged by 
Enron and obviously for Enron's particular reasons. If you had 
asked me how many partnerships Enron had last October before 
this situation blew up, I would have told you maybe five or so, 
I mean just what they had disclosed in the annual report, not 
hundreds, not thousands. No one's quite sure of just what the 
number came to be. All of this was happening in something of a 
parallel universe.
    The revelations about these deals were what sank the Enron 
ship. Phony earnings and phony equity absolutely destroyed all 
investor confidence in a stock which had risen 40 percent 
annually for the last 5 years. Portfolio managers had loved the 
stock; didn't like it, loved the stock. Despite numerous 
blunders and diversification fiascos, it didn't matter. The 
stock was going up 40 percent a year. It was a tide lifting all 
the boats. Then disaster struck. The wheels fell off in mid-
October, and in only 6 weeks time the company was gone. It took 
Long-Term Capital Management 5 weeks.
    Where were the analysts then and were they compromised? Yes 
and no. Let me explain. Enron paid out lots of investment 
banking fees. The bankers loved Enron. Enron loved analysts' 
strong buy recommendations. Guess what happened? It got them, 
lots of them. This is an abuse. When the worm turned and 
Enron's stock price fell from 90 to 80 to 50 to 20 to 10 to 5 
and so forth, all the way down to zero, the opinions didn't 
really change until the bitter end. Analysts are typically 
smart people, my competitors especially are a lot smarter than 
I am. They can get out of the way of a freight train, and this 
was a freight train. They didn't. Why not? I think it was the 
culture that was developed over what I call the crescendo phase 
of the bull market over the last 5 years, where, again, 
investment banking had a major influence in research.
    Ladies and gentlemen, if you want to restore confidence in 
this system and restore the integrity of research to where it 
belongs, then you need to take away some of the marbles here. 
We will not miss them. In my filed testimony, I urge you to 
sharply restrict flaky accounting or energy contracts like 
mark-to-market accounting or fair value accounting for marginal 
assets. These do not pass the laugh test on Wall Street 
anymore. You get no credit for them at all.
    I would urge you to consider deleveraging these special 
purpose entities out there from their very absurd levels right 
now. This is clearly an abuse out there. Enron's deals were 
basically very shaky LBOs, which were done at the equity 
investors' risk position. They were recourse to the parent 
there. And I would also urge you to review and reform the very 
highly compromised investment banking research conflicts which 
have had such tragic investing consequences with not only Enron 
but in the stock market at large. Thank you very much.
    [The prepared statement of John Olson follows:]


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    Mr. Greenwood. The Chair thanks the gentleman for your very 
excellent testimony. Before I recognize Mr. Bauer, I want to 
inform the subcommittee of some important matters relating to 
his testimony. First, Mr. Bauer is here to discuss his 
knowledge of and involvement in the Chewco transaction for 
which he served as the principal Andersen audit partner. He was 
not involved in the LJM transactions, which are the foci of our 
investigation today, and thus he is not in a position to answer 
questions relating to those transactions on behalf of Andersen.
    Accordingly, I would encourage members to keep their 
questions to Mr. Bauer focused on Chewco rather than on LJM or 
any other broader accounting issues or policies that I know the 
members would like to ask about. We will address those issues 
at a later hearing.
    Second, Mr. Bauer has cooperated fully and voluntarily with 
this committee with respect to the provision of documents and 
was interviewed by committee staff for more than 3 hours. Mr. 
Bauer is here, pursuant to subpoena, however, because he is not 
in a position to voluntarily testify about matters relating to 
his client, Enron, without its consent. We welcome him today, 
and we thank him for his testimony.
    With that, Mr. Bauer, I now recognize you for 5 minutes for 
an opening statement, sir.

                  TESTIMONY OF THOMAS H. BAUER

    Mr. Bauer. Thank you, Mr. Chairman. Good morning, Chairman 
Greenwood, Representative Deutsch, Chairman Tauzin, 
Representative Dingell and members of the subcommittee and full 
committee. I am Tom Bauer. I am a partner at Andersen, where I 
have worked since 1974. I am appearing today at the request of 
the subcommittee to discuss the accounting issues associated 
with the Chewco transaction.
    It recently has become clear that in 1997, when the Chewco 
transaction was conceived, Enron withheld information from me 
and misled me on the accounting issues related to Chewco. I 
knew nothing of this at the time. I was told I had been 
provided with all relevant documentation in Enron's possession. 
Had the information that was withheld been timely provided to 
me in 1997 when I requested it, the accounting advice and 
opinion of Andersen would have been different.
    Let me describe the background. In 1993, an Enron 
subsidiary and CalPERS formed an investment partnership known 
as JEDI. Because JEDI was a 50/50 partnership between Enron and 
CalPERS, Enron appropriately did not consolidate JEDI for 
financial reporting purposes.
    In late 1997, Ben Glisan of Enron, contacted me to discuss 
the accounting for a transaction that Enron was entering into. 
Mr. Glisan is an able accountant, who at the time was 
thoroughly familiar with the accounting rules governing special 
purpose entities. He told me CalPERS' limited partnership 
interest in JEDI would be acquired by an entity called Chewco 
Investments, LLP. In our discussion, Mr. Glisan told me that 
Chewco would be structured as a special purpose entity so that 
it would qualify for non-consolidation. Mr. Glisan also told me 
that an Enron employee, who I later learned was Michael Kopper, 
would have a very small interest in Chewco.
    I reminded Mr. Glisan that for Chewco to qualify for non-
consolidation, as he proposed, two tests had to be met. First, 
at least 3 percent of its capitalization had to be at-risk and 
attributable to entities independent of Enron. Second, neither 
Enron nor a related party of Enron, such as an employee, could 
control Chewco. Mr. Glisan assured me that Chewco would have 3 
percent independent equity and would not be controlled by Enron 
or an Enron employee.
    As the transaction unfolded, Mr. Glisan told me that 
Chewco's independent equity would come from two sources. First, 
he said that a large financial institution independent of Enron 
would make a large equity contribution. I later understood this 
large financial institution to be Barclays. According to Mr. 
Glisan, the second component of Chewco's third party equity 
would come from wealthy individual investors, who, with the 
exception of Mr. Kopper, would be independent of Enron.
    I requested that Mr. Glisan provide Andersen with all 
documentation in its possession relating to the transaction. He 
told me he would do so, and he thereafter provided pertinent 
documents to me. Enron senior officials also confirmed in 
writing that I had been given all documentation they had. In my 
written statement, I list some of the documents I received.
    The transaction documents and Enron board minutes I 
reviewed corroborated the representations I had received from 
Mr. Glisan and Enron. The documents described an $11.4 million 
independent equity infusion into Chewco, which represented 3 
percent of Chewco's capitalization. Also, the documents 
described and represented that Chewco was not affiliated with 
Enron. Thus, in 1997, based on what I was told and what I 
reviewed, Chewco appeared to meet the criteria for a non-
consolidated special purpose entity.
    Roughly 4 years later, on October 26, 2001, two Enron 
accounting employees called me to discuss concerns that had 
recently arisen about Chewco. On November 2, 2001, Andersen 
received a set of Chewco documents gathered by the Special 
Committee of Enron's Board of Directors. When I reviewed these 
materials, I was appalled to discover a document I had never 
seen before--a two-page side agreement between JEDI and Chewco 
amending their 1997 loan agreement. The side agreement was 
dated December 30, the very same day the loan agreement between 
JEDI and Chewco was signed. As I mentioned previously, Enron 
gave me the loan agreement during the 1997 audit. They did not 
reveal the existence of the contemporaneous side agreement.
    The Side Agreement materially altered the accounting 
treatment of Chewco. By itself, it caused Chewco to fail to 
qualify as an unconsolidated special purpose entity. Under the 
side agreement, JEDI was directed to deposit $6.58 million into 
reserve accounts created for Barclays' benefit at entities 
known as Big River and Little River. Barclays' $11.4 million 
equity infusion in Chewco appears to be conditioned upon the 
receipt of the $6.58 million from JEDI. This means that the 
independent at-risk equity in Chewco was not $11.4 million as 
represented, but rather much less, and significantly below the 
3 percent necessary for non-consolidation.
    The undisclosed side agreement meant that Chewco's and 
JEDI's financial statements should have been consolidated with 
Enron's since 1997. I do not know why this critical side 
agreement was withheld from me in 1997. I do not know who made 
the apparent decision to mislead Andersen and me. Had Andersen, 
in 1997, been provided the materials that I received in 
November 2001, there is no way I would have permitted Chewco to 
be treated as an unconsolidated special purpose entity, and a 
significant portion of the November 2001 restatement would have 
been avoided.
    Mr. Chairman, I hope the information I have provided is 
helpful to the committee's inquiry, and I am here to answer any 
questions that the committee may have. Thank you.
    [The prepared statement of Thomas H. Bauer follows:]
      Prepared Statement of Thomas H. Bauer, Partner, Andersen LLP
    Good morning, Chairman Greenwood, Representative Deutsch, Chairman 
Tauzin, Representative Dingell, and members of the Subcommittee and 
full Committee. I am Tom Bauer. I am a partner at Andersen, where I 
have worked since 1974. I am appearing today at the request of the 
Subcommittee to discuss the accounting issues associated with the 
Chewco transaction.
    By way of background, I grew up in Western Pennsylvania and 
attended college at Indiana University of Pennsylvania, where I 
received a bachelor's degree with a major in accounting in 1974. After 
graduating from college, I began my career with Andersen and have been 
with the firm ever since. I became a partner in 1986. In 1995, I joined 
the Enron audit engagement.
    I understand this hearing will focus on several transactions 
involving Special Purpose Entities. This morning I will discuss the 
Chewco transaction, with which I am familiar.
    It recently has become clear that, in 1997, when the Chewco 
transaction was conceived, Enron withheld information from and misled 
me on the accounting issues related to Chewco. I knew nothing of this 
at the time. I was told I had been provided with all relevant 
documentation in Enron's possession. Had the information that was 
withheld been timely provided to me in 1997, when I requested it, the 
accounting advice and opinion of Andersen would have been different and 
the major part of the restatement that occurred in November 2001 would 
have been unnecessary.
    Let me describe the background. In 1993, an Enron subsidiary and 
CalPERS formed a partnership known as Joint Energy Development 
Investments. It was called JEDI for short. JEDI invested in energy-
related securities and other investments. It was a very successful 
investment. Because JEDI was a 50-50 partnership between Enron and 
CalPERS, Enron appropriately did not consolidate JEDI for financial 
reporting purposes. These events occurred before I became involved with 
auditing Enron.
    In late 1997, Ben Glisan, the Enron transaction support employee 
with principal responsibility for accounting matters in the Chewco 
transaction, contacted me to discuss the accounting for a transaction 
that Enron was entering into. Mr. Glisan is an able accountant, who at 
the time was thoroughly familiar with the accounting rules governing 
Special Purpose Entities. He told me CalPERS' limited partnership 
interest in JEDI would be acquired for approximately $300 million by an 
entity called Chewco Investments, LLP. In our discussion, Mr. Glisan 
told me that Chewco would be structured as a Special Purpose Entity so 
that it would qualify for non-consolidation. Mr. Glisan also told me 
that an Enron employee, who I later learned was Michael Kopper, would 
have a very small interest in Chewco. He also said Enron was 
considering guaranteeing a loan that would finance a substantial 
portion of the transaction.
    I reminded Mr. Glisan that for Chewco to qualify for non-
consolidation, as he proposed, two tests had to be met. First, at least 
3 percent of its capitalization had to be at-risk and attributable to 
entities independent of Enron. Second, neither Enron nor a related 
party of Enron, such as an employee, could control Chewco. I confirmed 
this advice with Andersen's Professional Standards Group in Chicago. 
Mr. Glisan assured me that Chewco would have 3 percent independent 
equity and would not be controlled by Enron or an Enron employee.
    As the transaction unfolded, Mr. Glisan told me that Chewco's 
independent equity would come from two sources. First, he said that a 
large financial institution independent of Enron would make a large 
equity contribution. I later understood this large financial 
institution to be Barclays. According to Mr. Glisan, the second 
component of Chewco's third party equity would come from wealthy 
individual investors, who, with the exception of Mr. Kopper, would be 
independent of Enron.
    I requested that Mr. Glisan provide Andersen with all documentation 
in its possession relating to the transaction. He told me he would do 
so and he thereafter provided pertinent documents to me. Enron senior 
officials also confirmed in writing that I had been given all 
documentation they had. In this connection, I reviewed:

 minutes of Enron's Executive Committee of the Board of 
        Directors approving the transaction;
 the $132 million loan agreement between JEDI and Chewco;
 Enron's guarantee agreement of a $240 million loan from 
        Barclays to Chewco;
 the amended JEDI partnership agreement; and
 a representation letter from Enron and a representation letter 
        from JEDI, each of which stated that related party transactions 
        had been disclosed and that all financial records and related 
        data had been made available to Andersen.
    I also requested that I be provided documents relating to Chewco's 
formation and structure. Mr. Glisan told me that Enron did not have 
these documents and could not obtain them because Chewco was a third 
party with its own legal counsel and ownership independent of Enron. I 
did not view this as unusual. Quite frequently an auditor does not 
receive documents from a third party who is represented as being 
independent. Andersen did send and received a confirmation regarding 
the loan agreement from the Chewco representative.
    The transaction documents and Enron board minutes I reviewed 
relating to Chewco corroborated the representations I had received from 
Mr. Glisan and Enron. The documents described an $11.4 million 
independent equity infusion into Chewco, which represented 3 percent of 
Chewco's capitalization. Also, the documents described and represented 
that Chewco was ``not affiliated'' with Enron. Thus, in 1997, based on 
what I was told and what I reviewed, Chewco appeared to meet the 
criteria for a non-consolidated Special Purpose Entity.
    Roughly four years later, on October 26, 2001, two Enron accounting 
employees called me to discuss concerns that had recently arisen about 
the sufficiency of Chewco's independent equity. On November 2, 2001, 
Andersen received a set of Chewco documents gathered by the Special 
Committee of Enron's Board of Directors. When I reviewed these 
materials, I was appalled to discover a document I had never seen 
before--a two-page Side Agreement between JEDI and Chewco amending 
their 1997 loan agreement. The Side Agreement was dated December 30, 
1997, the very same day that the loan agreement between JEDI and Chewco 
was signed. As I mentioned previously, Enron showed me and gave me the 
loan agreement during the 1997 audit. They did not show me or tell me 
about or reveal the existence of the contemporaneous Side Agreement. 
The same individuals who signed the loan agreement also signed the Side 
Agreement.
    The Side Agreement materially altered the accounting treatment of 
Chewco. By itself, it caused Chewco to fail to qualify as an 
unconsolidated Special Purpose Entity. Under the Side Agreement, JEDI 
was directed to deposit $6.58 million into reserve accounts created for 
Barclays' benefit at entities known as Big River and Little River. 
Barclays' $11.4 million equity infusion in Chewco appears to be 
conditioned upon the receipt of the $6.58 million from JEDI. This means 
that the independent at-risk equity in Chewco was not $11.4 million as 
represented, but rather much less, and significantly below the 3 
percent necessary for non-consolidation.
    The undisclosed Side Agreement meant that Chewco's and JEDI's 
financial statements should have been consolidated with Enron's since 
1997. I do not know why this critical Side Agreement was withheld from 
me in 1997. I do not know who made the apparent decision to mislead 
Andersen and me. Had Andersen, in 1997, been provided the materials 
that I received in November 2001, there is no way I would have 
permitted Chewco to be treated as an unconsolidated Special Purpose 
Entity, and a significant portion of the November 2001 restatement 
would have been avoided.
    In addition, other documents provided to me for the first time in 
November 2001 raised other accounting issues. Had I known this 
information in 1997, I also would have modified my conclusions and 
opinions relating to Chewco.
    Mr. Chairman, I hope the information I have provided is helpful to 
the Committee's inquiry. I am here to answer any questions that the 
Committee may have.

    Mr. Greenwood. It was very helpful, Mr. Bauer, and we thank 
you for being with us this morning for your testimony.
    Mr. McMahon, you are recognized for 5 minutes for an 
opening statement, sir.

                  TESTIMONY OF JEFFREY MCMAHON

    Mr. McMahon. Thank you, Mr. Chairman. Good afternoon. Mr. 
Chairman and members of the committee, my name is Jeff McMahon. 
I am currently the president and chief operating officer of 
Enron Corp. I have been an employee of Enron since 1994. From 
late October of last year until last week, I served as chief 
financial officer of the company. Before that I was president 
and chief executive officer of Enron's Industrial Markets 
Group. From 1998 until March 2000, I was the treasurer of Enron 
Corp. And before that I served as chief financial officer of 
its European operations.
    As the committee knows, I was named as president and chief 
operating officer just last week, at the same time that Stephen 
Cooper was named the new interim chief executive officer and 
chief restructuring officer of the company. As part of the new 
management team at Enron, my focus is on the future--the future 
of our business, the future of our nearly 20,000 employees 
worldwide who are looking for continued employment with the 
company, the future of our over 8,000 retirees, who are looking 
for continued retirement benefits from the company, and various 
other stakeholders, including our creditors, who have an 
interest in Enron's future.
    Working closely with the board of directors and the 
Creditors Committee, we are developing a restructuring plan 
designed to bring the company out of bankruptcy and preserve 
value for the company;s creditors, its employees and its 
stakeholders. I believe that Enron can emerge from bankruptcy 
by returning to its roots. As Mr. Cooper has expressed last 
week, our reorganized business will be dedicated primarily to 
the transmission of natural gas and the generation of 
electricity.
    With respect to the issues the committee is examining, as 
the Chairman knows, I have been meeting and fully cooperating 
with the committee's staff and welcome today's opportunity to 
answer, to the best of my ability, questions the committee may 
have about the past events at Enron or our future direction. 
Thank you, Mr. Chairman.
    [The prepared statement of Jeffrey McMahon follows:]
   Prepared Statement of Jeff McMahon, President and Chief Operating 
                       Officer, Enron Corporation
    Good morning. Mr. Chairman and Members of the committee, my name is 
Jeff McMahon. I am President and Chief Operating Officer of Enron. I 
have been an employee of Enron since 1994. From late October of last 
year until this past week, I served as Chief Financial Officer of the 
company. Before that I was Chairman and Chief Executive Officer of 
Enron's Industrial Markets Group. From 1998 until March 2000 I was 
Treasurer of the company. Before that I served as Chief Financial 
Officer of European Operations.
    As the committee knows, I was named as President and COO just last 
week, at the same time that Stephen Cooper was named the new interim 
Chief Executive Officer of the company. As part of the new management 
team at Enron, my focus is on the future of Enron, our nearly 20,000 
employees worldwide, our over 8,000 retirees and various stakeholders. 
Working closely with the Board of Directors and the Creditors 
Committee, we are developing a restructuring plan designed to bring the 
company out of bankruptcy and preserve value for the company's 
creditors, its employees and shareholders.
    I believe that Enron can emerge from bankruptcy by returning to its 
roots. As Mr. Cooper expressed last week, our reorganized business will 
be dedicated to the movement of natural gas and the generation of 
electricity.
    With respect to the issues the committee is examining, as the 
Chairman knows, I have been meeting and fully cooperating with the 
committee's staff, and welcome the opportunity today presents to answer 
any questions the committee may have about the past events at Enron or 
our future direction.
    Thank you, Mr. Chairman.

    Mr. Greenwood. Thank you, Mr. McMahon.
    Mr. Mintz, good morning. You are recognized--good 
afternoon--for 5 minutes for your opening statement.

                  TESTIMONY OF JORDAN H. MINTZ

    Mr. Mintz. Thank you, Mr. Chairman.
    Mr. Greenwood. You might want to pull that right up; it is 
fairly directional. Thank you.
    Mr. Mintz. Good afternoon, Mr. Chairman and members of the 
committee. My name is Jordan Mintz. I have served as Enron's 
vice president and general counsel for Corporate Development 
since November of 2001. Between October 2000 and November 2001, 
I was vice president and general counsel for Global Finance. 
The 4 years prior, I served as vice president for Tax for Enron 
North America, formerly Enron Capital and Trade Resources.
    Mr. Chairman, as you know, I am appearing this afternoon 
voluntarily and have, to date, fully and freely cooperated with 
the committee in its investigation. I intend to continue to do 
so. I welcome the opportunity this hearing presents for the 
committee to hear directly from me concerning the relevant 
facts related to my role at Enron.
    Mr. Chairman, I will be glad to answer any questions you or 
any other members of the committee may have. Thank you, Mr. 
Chairman.
    [The prepared statement of Jordan H. Mintz follows:]
   Prepared Statement of Jordan H. Mintz, Vice President and General 
          Counsel for Corporate Development, Enron Corporation
    Good morning. Mr. Chairman and Members of the committee, my name is 
Jordan Mintz. Since November 2001, I have served as Enron's Vice 
President and General Counsel for Corporate Development. Between 
October 2000 and November of last year, I was Vice President and 
General Counsel for Enron Global Finance. The four years prior, I 
served as Vice President for Tax at Enron North America, formerly Enron 
Capital and Trade.
    Mr. Chairman, as you know, I am appearing this morning voluntarily 
and have, to date, fully and freely cooperated with the committee in 
its investigation. I intend to continue to do so. I welcome the 
opportunity this morning's hearing presents for the committee to hear 
directly from me concerning the relevant facts related to my role at 
Enron.
    Mr. Chairman, I will be glad to answer any questions you or any 
other members of the committee may have.
    Thank you, Mr. Chairman.

    Mr. Greenwood. Thank you, Mr. Mintz. The Chair recognizes 
himself for 5 minutes for purpose of inquiry, and let me start 
with you, Mr. McMahon, if I may.
    In 1999, you were the treasurer of Enron's Global Finance 
Group. At that time, Andy Fastow, Michael Kopper, Ben Glisan, 
Ann Yaeger, Trushar Patel and Kathy Lynn also worked there. 
Would you please explain why the Global Finance Group existed 
and what its top officers, particularly Fastow, Kopper and 
Glisan, what they did there, what their roles were?
    Mr. McMahon. At that point in time, the Global Finance 
Department of Enron existed for several purposes. One portion 
of it, which I ran at the time as the treasurer, was to 
maintain adequate liquidity of the company for its ongoing 
businesses. A separate function--and I reported at the time to 
Andrew Fastow who was the CFO. At the same time, there was a 
separate group, also reporting to Mr. Fastow that was headed by 
Michael Kopper, which was essentially a Special Projects Group. 
And that group was responsible for various finance activities 
that were--my understanding were at the direction of Mr. 
Fastow. And the individuals you named all fell under Mr. 
Kopper's organization at that point in time, I believe.
    Mr. Greenwood. Would you describe your efforts to develop a 
private equity fund at Enron and why Enron wanted to develop 
the fund?
    Mr. McMahon. Yes. In approximately mid-1999, we identified 
an area where we thought we could add some efficiency to the 
finance activities of the company by seeing if we could get 
third party, unrelated, private equity funds to commit some 
capital to some future transactions that Enron may want to 
undertake with these third parties. So at that point in time, 
we had engaged or hired some outside individual to come and 
join Enron for the purpose of trying to go into the private 
equity markets and see if we could create some private equity 
liquidity for third parties.
    Mr. Greenwood. At some point, Andy Fastow told you that he 
was going to develop a private equity fund and that Michael 
Kopper was going to be the lead man on the project. When was 
that conversation, and tell the committee about that 
conversation.
    Mr. McMahon. I believe the timing of that was somewhere 
around mid-1999, maybe slightly before that. But the individual 
I just alluded to who we hired to bring to Enron to go do that, 
prior to his starting with the organization, Mr. Fastow 
informed me that he had changed his mind, he did not want this 
new employee to do that; in fact, he wanted Mr. Kopper to do 
that in his Special Projects Group.
    Mr. Greenwood. Now, ultimately, Fastow's Private Equity 
Group was formed under the name LJM. What does that name stand 
for?
    Mr. McMahon. I believe those are initials of his wife and 
two children.
    Mr. Greenwood. And when did you first learn that Fastow had 
a personal equity interest in the fund?
    Mr. McMahon. I learned of his ownership of the general 
partner of LJM I believe, again, around mid-1999 when I was 
present at what I believe----
    Mr. Greenwood. How did you react to that, when you learned 
that? And how did you react to the fact that you hadn't known 
this all along?
    Mr. McMahon. Well, I was at the Finance Committee meeting 
when it was presented to the Finance Committee. I was 
surprised----
    Mr. Greenwood. By whom was it presented?
    Mr. McMahon. It was presented by Mr. Fastow.
    Mr. Greenwood. Mr. Fastow announced this.
    Mr. McMahon. Yes.
    Mr. Greenwood. And you were taken by surprise.
    Mr. McMahon. Well, I think at the time he announced it, I 
was taken by surprise of the fact that the board was ultimately 
recommending--or was asked to recommend to waive their code of 
conduct.
    Mr. Greenwood. What was your reaction to that? Were you 
comfortable with that?
    Mr. McMahon. I am sorry?
    Mr. Greenwood. Were you comfortable with that?
    Mr. McMahon. I don't know if that was a decision that I 
would have made at the time, but I was not party to the board 
deliberations.
    Mr. Greenwood. Did you think it was appropriate?
    Mr. McMahon. Again, I am not so sure that would be the same 
decision I would have made at the time.
    Mr. Greenwood. Did you see any problems with the chief 
financial officer having an equity interest in a privately held 
fund that does business with its own company?
    Mr. McMahon. I think it is pretty clear that is an obvious 
conflict of interest for a senior officer----
    Mr. Greenwood. Was it clear to you at the time?
    Mr. McMahon. That there was a conflict of interest?
    Mr. Greenwood. Right.
    Mr. McMahon. Yes.
    Mr. Greenwood. So alarm bells went off in your head?
    Mr. McMahon. Well, at the time, it was unclear exactly what 
this partnership would evolve into, so it was a conflict that 
clearly existed, and I think everyone who saw it realized it.
    Mr. Greenwood. Did you say so at the time?
    Mr. McMahon. At the time, I was at the board meeting and 
heard about the conflict but didn't realize the size of the 
partnership as it would evolve to.
    Mr. Greenwood. My time has expired. The Chair recognizes 
the gentleman from Florida, Mr. Deutsch.
    Mr. Deutsch. Thank you, Mr. Chairman. As I mentioned in my 
opening statement, I am going to try to understand just one of 
the, again, thousands of partnerships: the LJM/Rhythms 
transactions. You are in charge now. In looking at this 
partnership and what occurred in terms of basically buying the 
put from yourself, I mean is there any legitimate business 
purpose in hindsight that someone could defend this 
partnership?
    Mr. McMahon. You are asking me the question?
    Mr. Deutsch. Any of you, but Mr. McMahon?
    Mr. McMahon. Frankly, I am not very familiar with the 
details of that, so it is hard for me to tell you what the 
business reason was at the time.
    Mr. Deutsch. Well, again, I went through it in the opening 
statement. Enron had stock in Rhythms that they had bought at 
IPO for $10 million. The value after the IPO was, I guess, 
close to $400 million. So they wanted to lock in the gains, so 
they wanted to buy a put, right? So they, basically--and Fastow 
was CFO at the time, he was general partner of LJM, and, 
basically, Enron bought a put, actually not even from LJM but 
from a swap sub that LJM created, all right? This was 
capitalized by shares of Enron stock. And what happened was, 
and this, again, where I use the word and I use it very 
seriously, on March 8 of last year, because Rhythms--basically, 
the $400 million, which it was--when it was $400 million, when 
the put was bought, that $400 million gain was booked on 
Enron's balance statement as a gain, right? So if someone was 
looking at Enron's balance statement, they would see a gain.
    Well, first all, where is the arms-length transaction, 
because could anyone reasonably assume that this entity could 
in fact ever make good on the put? In other words, this was 
Enron basically buying a put from itself, and, again, as I had 
mentioned, Fastow immediately took a general partnership share 
in the millions of dollars from LJM. Mr. Olson, do you want to 
respond? I mean is there anyone who can defend what occurred 
here?
    I mean this looks like fraud, and, I guess, let me just 
mention, on March 8 of last year, because the value had gone 
down so much, that Enron transferred 3.1 million shares without 
any consideration at all, zip, nothing, gave it, about $150 
million on Enron stock to the partnership, because the 
partnership at that point was undercapitalized. What ended up 
happening in this whole--and, again, if you look at the 
transaction in the hindsight we have now, the only purpose was 
to lock in the gain on the balance sheet, and then at that 
point, someone who wanted to--and that is our whole point--
wanted to understand what was going to go on could not.
    And I look at this transaction, obviously in hindsight, 
that I cannot come up with any legitimate business purpose for 
this transaction, that it was in fact set up as a fraud, as a 
fraud for someone in here, and we still don't know who the 
limited partners are. We have not been able to obtain that 
information at this date. Our staff does not--I mean there is a 
question that $15 million, which is the 3 percent, which was 
transferred, then some other activity occurred, because, 
actually, this entity didn't have the 3 percent. But we don't 
even know if this $15 million ended up being lost. Mr. Olson?
    Mr. Olson. In my opinion, as a securities analyst, there is 
no meaningful business purpose behind this particular 
situation. I was obviously not aware, this is the first time I 
have seen it described as such. They were essentially gaming in 
their own stock. I recall the word on the street, anecdotal 
evidence, was that they had done fair value accounting on this 
in order to shield some other losses or reserves that they had 
taken the prior year on an oil and gas loan portfolio. And they 
were trying to preserve this.
    Mr. Deutsch. Okay. Is this fraud?
    Mr. Olson. I am not qualified to tell you; I am not a 
lawyer.
    Mr. Deutsch. If you are an analyst and you knew that this 
was going on, what would have happened to the stock in the 
marketplace?
    Mr. Olson. I think the stock would have cratered 
immediately.
    Mr. Deutsch. And that is what should have happened.
    Mr. Olson. It was never disclosed.
    Mr. Deutsch. And that is the illegal activity too, because 
it was never disclosed, and this becomes an issue on the 8K. 
This is an extraordinary, an extra ordinary business event. 
Enron transferred $150 million to an entity without any 
consideration. That was on March 8. On March 22, what Enron 
then did is basically they realized that this entity could 
never make good on the put and so the deal was off. And at that 
point is when the restatement occurred. I mean and maybe, Mr. 
Bauer--I mean why was that not recorded as an extra ordinary 
event?
    Mr. Bauer. Congressman, I am not familiar with the 
transaction. That was not my area of the Enron audit, sorry.
    Mr. Deutsch. I mean I see my time has expired, but this is 
one of 4,000 partnerships.
    Mr. Stearns. I thank the gentleman. The gentleman's time 
has expired. The full chairman of the committee, Mr. Tauzin, 
recognized.
    Chairman Tauzin. Thank you, Mr. Chairman. I think it is 
important to note that our investigators have discovered that 
while that was not being disclosed while this deal was put 
together, Mr. Skilling, who will testify later, in the same 
period of time sold Enron stock at a price of between $2.3 
million and $2.7 million. So while this deal was inflating the 
value of Enron stock, Mr. Skilling was profiting in the 
marketplace, when others, who might have known about problems 
with this deal, might have recommended a sell.
    We have limited time, but I want to try to take all of you 
through this quickly. One of the questions that has troubled me 
from the beginning of this investigation is why on Earth 
investment bankers couldn't see what was going on. And, Mr. 
Olson, you kind of tell the story, don't you, that Enron is 
basically saying, ``You are either our friend or you are not. 
Your rate us down, we don't do business with you.'' You got a 
call from a CEO of Enron. Who was that, by the way?
    Mr. Olson. That was Mr. Lay.
    Chairman Tauzin. Mr. Lay called you.
    Mr. Olson. Yes. I had called him.
    Chairman Tauzin. And he said, ``We are going to deal with 
our friends,'' right?
    Mr. Olson. Yes.
    Chairman Tauzin. And then he went through a litany of all 
the unfriendly comments you made about Enron, right?
    Mr. Olson. Well, the relative lack of enthusiasm, I should 
say.
    Chairman Tauzin. The lack of friendship.
    Mr. Olson. Yes.
    Chairman Tauzin. And Mr. McMahon, you actually gave us 
instances where, surprise, surprise, bankers called you up. 
Here we got a call from Rob First, the Managing Director of 
Merril Lynch, asking if it is okay for members of Merril Lynch 
to invest in LJM2, whether you thought that was a conflict of 
interest. You told him it was, right?
    Mr. McMahon. Correct.
    Chairman Tauzin. And who called you to complain about that?
    Mr. McMahon. About my response to Mr. First?
    Chairman Tauzin. Yes.
    Mr. McMahon. Mr. Fastow.
    Chairman Tauzin. Oh, yes. What did he tell you, ``You are 
messing in my deals here,'' right?
    Mr. McMahon. He told me that I was jeopardizing the LJM2 
fund-raising exercise.
    Chairman Tauzin. Yes. He was trying to raise money for 
these bankers, and the bankers are calling you to find out if 
they can invest, and you are saying, ``That is a conflict of 
interest.'' And Fastow is calling you to say, ``Don't you dare 
tell them that. I want their money.'' And in fact you got a 
call from Paul Riddle with the First Union Bank saying that he 
was told he would get the next bond deal if he invested, right?
    Mr. McMahon. Yes. The banks really had two different camps 
after the fund-raising exercise. One was people who expected 
deals in the future because of investing and others who were 
concerned that----
    Chairman Tauzin. And Mark DeVito with Merril Lynch Banker, 
same kind of call, right?
    Mr. McMahon. That is correct.
    Chairman Tauzin. Did that shock you, that they were being 
offered these special bond deals and the next bond deal if they 
made these investments? These are the people analyzing the 
stock and telling people whether to buy or not, right? And 
investing, right?
    Mr. McMahon. Well, the individuals I spoke to were 
typically on the bond side of the house rather than the analyst 
side.
    Chairman Tauzin. The bond side/investment side. But, Mr. 
Olson, this is what you are talking about. You are basically 
talking about the incestuous relationship between--what do we 
call it now, synergy, we call it synergy between the investment 
bankers who tell people whether or not this is a good place to 
invest who themselves in it, and the deals they are getting, 
the good relationships they are getting with Enron are chances 
to invest in these partnerships, is that right?
    Mr. Olson. Investment bankers are not the friends of 
securities analysts.
    Chairman Tauzin. I want to turn to you quickly. First of 
all, Mr. Bauer, let me make sure I understand what you are 
saying. You are telling us that the deal that brought down the 
house of cards, the Chewco deal, did not meet accounting 
standards as you understood them. It didn't meet it because of 
a side agreement you were not shown; is that correct?
    Mr. Bauer. Congressman, I don't know if that is the entity 
that brought down the house of cards, but in response to your 
question, I do believe I was not----
    Chairman Tauzin. Well, let us see if it was.
    Mr. Bauer. Okay.
    Chairman Tauzin. The failure of Chewco to meet the 
accounting standards, that 3 percent rule, investment rule, 
because of the JEDI investment?
    Mr. Bauer. Yes, sir.
    Chairman Tauzin. That literally caused Enron to restate its 
earnings and to declare debt that had been off its books, 
right?
    Mr. Bauer. That is correct, sir.
    Chairman Tauzin. That started the whole tumble, didn't it?
    Mr. Bauer. Yes, sir.
    Chairman Tauzin. Now, and you are telling us----
    Mr. Bauer. In conjunction with some other----
    Chairman Tauzin. [continuing] it was a side agreement that 
was not shown to you that literally made that deal a violation 
of accounting standards, right?
    Mr. Bauer. Yes, sir.
    Chairman Tauzin. All right. I want to quickly turn to you, 
Mr. Mintz, then we will come back later. But your story to us 
is a struggle. Your story to us is a--just like Mr. McMahon who 
goes to Mr. Skilling and tells him, ``You know, I think there 
is conflicts of interest, you have got all kinds of problems 
here. You have got to reassign Mr. McMahon to a new job as a 
result of all that.'' And you got some angry calls from Mr. 
Fastow, according to what you tell us. Mr. Mintz, yours was a 
struggle to get Mr. Skilling to do a simple thing, and that was 
to sign the documents approving these deals. Why didn't he sign 
them?
    Mr. Mintz. I don't know, Mr. Chairman.
    Chairman Tauzin. How long did you try to get him to sign 
them?
    Mr. Mintz. I sent him a memo in mid-May 2001 and gave him 
about a week to respond. I didn't hear from him. I asked my 
secretary to call his secretary to see if I could get on his 
schedule within 3 days. She didn't return the calls. Maybe I 
let another 4 or 5 days pass. I asked my secretary to make a 
call again, and no response.
    Chairman Tauzin. Yours is a story of a constant struggle to 
force Enron to do what it should have done, and that is 
document a fair arms-length transaction with these partnerships 
offering these deals to other companies or other people first 
to make sure it was in the best interest of Enron, to document 
the lack of conflict of interest, to document that the Audit 
Committee was reviewing this. And I am looking at one of those 
sheets that Mr. Skilling wouldn't sign. I am looking at the 
bottom. It is an interesting one. It says, Mr. Kopper, employee 
of Enron, who never got a waiver, is negotiating the deal for 
LJM2. It says that he has been cleared, and I don't think he 
was, so that is a kind of interesting point.
    But at the very end of it, the very end of it, there is a 
question: Has the Audit Committee of Enron Corporation Board of 
Directors reviewed all Enron/LJM transactions within the past 
12 months? On that form, you have checked off, ``no.'' Have all 
recommendations of the Audit Committee relative to Enron/LJM 
transactions been taken into account in this transaction? The 
box that is checked off, ``no.'' And then what follows is very 
interesting. Audit Committee has not reviewed any transactions 
to date. Was that the reason Mr. Skilling wouldn't sign this 
document, do you think, because it was an admission that the 
Audit Committee was not asked to review, had not reviewed any 
of these deals?
    Mr. Mintz. I don't know.
    Chairman Tauzin. You don't know.
    Mr. Mintz. I just don't know, Mr. Chairman.
    Chairman Tauzin. But he wouldn't sign it, would he? In 
fact, if we look at the last page, everybody signed. On January 
5, everybody signed except one person, the guy in charge, the 
guy who should have been either approving or disapproving, the 
guy who should have been sure that the Audit Committee was 
reviewing these deals, the guy you tried to get to sign who 
would never sign, who will be before this committee in just a 
little while. Is that correct, sir?
    Mr. Mintz. Yes.
    Chairman Tauzin. Thank you, sir.
    Mr. Stearns. The gentleman's time has expired. Mr. Stupak's 
recognized.
    Mr. Stupak. Thank you, Mr. Chairman. I want to pick up 
where Mr. Mintz--where Chairman Tauzin left off. Isn't it true 
in June of 2001 you hired a law firm of Fried Frank to 
investigate and evaluate the propriety of the LJM transactions 
and agreed to pay them as much as $620 an hour?
    Mr. Mintz. Congressman, if I recall correctly, I engaged 
them the month before in May, Fried Frank.
    Mr. Stupak. So you hired an outside firm in May of 2001.
    Mr. Mintz. Yes, sir.
    Mr. Stupak. All right. Why did you decide to go outside 
your corporate counsel? Wasn't Vinson & Elkins your law firm?
    Mr. Mintz. One of the firms we use regularly, that is 
correct.
    Mr. Stupak. Well, why did you decide to go outside the law 
firm? Isn't Fried & Frank from New York--Fried Frank, I guess? 
Is that right?
    Mr. Mintz. New York office with a large presence in 
Washington, D.C.
    Mr. Stupak. But why did you go outside?
    Mr. Mintz. I came into the job at Global Finance in October 
2000. Prior to that, I was a tax attorney for 18 years. I met 
with my predecessor for 2 days in making the transition. He 
brought me up to speed on what was going on, reviewed the 
employees in the Legal Department, et cetera, and never 
mentioned LJM; got into the office, opened up the files and a 
substantial amount of documentation, deal approval sheets that 
Chairman Tauzin was referring to----
    Mr. Stupak. Right. Were all there.
    Mr. Mintz. Were all there.
    Mr. Stupak. Made you nervous.
    Mr. Mintz. Well, very quickly, I was also down on the 20th 
floor, the Global Finance people were, and sort of 
meticulously, methodically, as a lawyer may do, I wanted to get 
my arms around what was going on. And over a period of time, as 
I performed my due diligence, I brought to the attention to 
certain members, senior members of the company concerns I had, 
and I went to Mr. Buy and Mr. Causey and met with them 
regularly and wrote them a memo about some of the problems I 
saw in the process and procedures associated with the LJM 
approval. I started meeting with our general counsel, Mr.----
    Mr. Stupak. Bottom line, you had some real concerns about 
the LJM transactions, right?
    Mr. Mintz. In April of 2001, Mr. Fastow announced that LJM 
was going to look to buy the Enron Wind Company, which was 
approximately a $600 million acquisition.
    Mr. Stupak. We all know that, but yes or no, you were 
uncomfortable what you were seeing with LJM.
    Mr. Mintz. I am sorry, that is correct.
    Mr. Stupak. All right. Bottom line, you really distrust--I 
will take the word ``really'' out of there--but did you 
distrust the service of the in-house counsel, and that is why 
you hired the outside counsel from New York to look at this, 
because you needed an objective opinion of what was going on?
    Mr. Mintz. I wanted somebody that had no linkage, no 
connections with the company and just to take a fresh look at 
everything.
    Mr. Stupak. I take it that is a yes answer to my question 
then.
    Mr. Mintz. Yes, sir.
    Mr. Stupak. Okay. Did they produce a report, anything in 
writing back to you as to their investigation, the law firm?
    Mr. Mintz. Yes, they did.
    Mr. Stupak. Where is it now, that report?
    Mr. Mintz. There are a number of copies in the company, and 
they have been turned over to a number of committees as well as 
the SEC and the FBI.
    Mr. Stupak. I am just--and once again, why didn't you hire 
Vinson & Elkins to do this, look at this work?
    Mr. Mintz. I was concerned about issues, I wanted to get 
somebody to look over my shoulders who just had no knowledge, 
no insight, no background regarding LJM.
    Mr. Stupak. Okay. Now, when you were looking at LJM, you 
consulted Mr. Jeffrey McMahon, did you not?
    Mr. Mintz. When I started my due diligence regarding LJM, I 
met with a number of different individuals who had some 
familiarity with them, and Jeff was one of them.
    Mr. Stupak. Okay. What was your impression? Did Mr. McMahon 
understand how Mr. Fastow could supervise Enron employees as 
chief financial officer while at the same time the same 
employees were negotiating against LJM on behalf of Enron? 
Would that issue come up?
    Mr. Mintz. As soon as I got down to the 20th floor, I saw a 
lot of dysfunctionality on that floor along the lines of what 
you are suggesting.
    Mr. Stupak. Well, dysfunctionality because you had some 
people at Enron, like Mr. Fastow and others, wearing two hats, 
trying to look out for LJM at the same time dealing with Enron, 
negotiating back and forth, basically wearing two hats, and 
causing real conflicts of interest and real ethical problems, 
does it not, within a corporation like Enron?
    Mr. Mintz. I think that is a fair assessment.
    Mr. Stupak. Okay. Did Mr. McMahon voice these concerns to 
you, and did he voice them with Mr. Skilling, if you know?
    Mr. Mintz. Jeff shared with me his concerns and his 
conversation with Mr. Skilling.
    Mr. Stupak. Is it true that Mr. Buy advised you not to 
stick your neck out by approaching Mr. Skilling with your 
concerns about LJM?
    Mr. Mintz. Well, I got with Mr. Causey, Mr. Buy when I 
wanted to approach Mr. Skilling about reviewing the 
documentation and making sure they were executed and finding 
out whether it was ministerial or not. And I also suggested 
maybe we should check with Mr. Skilling to make sure he is 
still comfortable with this arrangement. And, yes, Mr. Causey 
said, ``I wouldn't stick my neck out.''
    Mr. Stupak. Mr. Causey said that----
    Mr. Mintz. Mr. Buy, I am sorry. I am sorry.
    Mr. Stupak. [continuing] or Mr. Buy said he wouldn't stick 
your neck out? Meaning if you went to Skilling you would be 
given a new job or something, like Mr. McMahon? Was that what 
they did at the corporation, when you didn't agree with the 
higher ups, they moved you out?
    Mr. Mintz. I can only speak for myself. I don't know what 
other people's experience was.
    Mr. Stupak. Well, it sounds like maybe they put you down on 
the 20th floor and you didn't want to go there, it is so 
dysfunctional you are telling me, right?
    Mr. Mintz. Well, as a former tax attorney, I was looking 
forward to the opportunity of being a real attorney.
    Mr. Stupak. But you took it as really sort of as a threat, 
if I went to Mr. Skilling, somehow there would be retribution, 
right?
    Mr. Mintz. Both Ricks shared with me that Jeff was very 
fond of Andy, don't go there.
    Mr. Greenwood. The time of the gentleman has expired.
    Mr. Stupak. Mr. Chairman, thank you for your courtesy, but 
could I place the Fried Frank report in the record?
    Mr. Greenwood. Without objection, that document will be 
incorporated in the record of the hearing.
    And the Chair recognizes for 5 minutes the gentleman from 
Florida, Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman. Mr. Mintz, I would 
like you to go to document number 22. It is a document that you 
wrote, and it is dated September 7, 2000 regarding the private 
placement memorandum for LJM3, a new proposal. Fastow's 
proposed new partnership that evidently ultimately never got 
off the ground. It seems that upon review of this PPM you were 
quite alarmed at some of the discussion in it about how 
Fastow's dual role at Enron and the partnership would accrue 
benefits to the partnerships' investors, particularly because 
of Fastow's insider status and knowledge of proprietary deal 
flows. What was your reaction to this PPM, and who did you 
discuss it with?
    Mr. Mintz. Congressman, I wasn't a securities lawyer, but 
on its face, when I had a chance to review the PPM and I saw 
the language that was being used in order to attract investors, 
I was concerned.
    Mr. Stearns. And what was your concern? Just give us a 
couple sentences.
    Mr. Mintz. It appeared that they were selling to investors 
inside information.
    Mr. Stearns. They were selling to investors inside 
information.
    Mr. Mintz. That this fund was effective because they had 
insights into particular assets of the company.
    Mr. Stearns. Did you feel also that there was any 
transparency? Was there a problem with transparency too?
    Mr. Mintz. I am sorry, I am not sure I understand.
    Mr. Stearns. In other words, was information being 
concealed?
    Mr. Mintz. I don't know.
    Mr. Stearns. Okay. Did you raise your concerns with Enron's 
in-house and outside security experts after you were aware of 
this, as you say, that you felt that it was not up and up?
    Mr. Mintz. I wanted to make sure that they were aware of 
it, and I wanted to get their guidance because they were the 
experts.
    Mr. Stearns. Mr. Mintz, what did they say exactly to you 
when you went to them, specifically?
    Mr. Mintz. There were some comments made regarding the 
reference of how the board waived the conflict under the code 
of conduct. And I passed that onto LJM's outside counsel.
    Mr. Stearns. You mentioned in your--just previously you 
mentioned insider information is what concerns you.
    Mr. Mintz. Well, it was the way----
    Mr. Stearns. Did they say to you that they agreed with you, 
that this was a case of insider information, which you voiced 
your concern?
    Mr. Mintz. Well, again, I wasn't the securities lawyer, so 
I was relying on their assessment. Their assessment was that 
this was familiar, it was similar to what was in LJM2. That was 
approved by the board, so they didn't take exception to it.
    Mr. Stearns. I have got the PPM for LJM2 here, and document 
number 11, if you could just pull that up. Page 3. Let me draw 
your attention to the top of the page: ``The ability to 
evaluate investments with full knowledge of the assets due to 
their active involvement in the investment activities at Enron, 
the principals will be in an advantageous position to analyze 
potential investments for LJM2. The principals, as senior 
financial officers of Enron, will typically be familiar with 
the investment opportunities LJM2 considers.'' This is a key 
part, ``The principals believe that their access to Enron's 
information pertaining to potential investments will contribute 
to superior returns.''
    Now, let me just go to page 7 here. Mr. Fastow is at the 
bottom of the page, dual role advantages. ``Mr. Fastow will 
continue to hold the titles and responsibilities of executive 
vice president and chief financial officers of Enron and 
Messieurs Kopper and Glisan will continue to serve as senior 
financial officers of Enron, while acting as owners and 
managers of the general partner. As a result investors in the 
partnership should benefit from Mr. Fastow's and the other 
principals' due roles which will facilitate the partnership 
access to Enron deal flow. The principals' dual roles in 
managing the partnership while remaining employed as senior 
official officers at Enron, however, raises certain conflicts 
of interest that could affect the partnership.
    Now, what you raised in LJM3 was already in place in LJM2, 
wouldn't you agree?
    Mr. Mintz. That is correct.
    Mr. Stearns. So the concerns you had on this LJM3, which 
did not get off the ground, were already replicated in the 
previous one.
    Mr. Mintz. That is correct.
    Mr. Stearns. And yet everybody signed off on LJM2 Mr. 
Mintz. That is my understanding.
    Mr. Stearns. Mr. Olson, just maybe a quick comment on some 
of our discussion here. In terms of--I mean even Mr. Mintz had 
indicated that it was a problem. Would you mind giving your--
based upon what I read about LJM2 and based upon Mr. Mintz' 
memo on LJM3, was he right to ask the securities analyst to 
say, ``What is wrong with this?''
    Mr. Olson. I am not sure I understand that he was asking a 
securities analyst to say, ``What is wrong with this?''
    Mr. Stearns. Well, what he did is in his memo had some 
concern about LJM3, so he went to the securities lawyers and 
say, ``Here are my concerns,'' and they came back and sort of 
didn't agree with him. And my question is to you, in your 
capacity, did you agree with Mr. Mintz about this development 
of this partnership?
    Mr. Olson. I would be very concerned, again, as a 
securities analyst. This is a blatant conflict of interest. 
Again, it would never have passed the smell test had it been 
publicly disclosed.
    Mr. Stearns. So Mr. Chairman, in conclusion, we have a 
blatant conflict of interest here on LJM3, and it is identical 
to LJM2, so what you are saying, Mr. Olson, would also apply to 
LJM2.
    Mr. Olson. Right.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the gentlelady from Colorado, Ms. DeGette, for 
5 minutes.
    Ms. DeGette. Thank you, Mr. Chairman. Mr. Mintz, in Mr. 
Winokur's testimony, his written testimony, he talks about the 
transaction approval process for deal approval sheets, or the 
DASHs, correct?
    Mr. Mintz. I haven't seen----
    Ms. DeGette. You haven't seen it. Well, what he says is 
that the deal approval sheets set out the economic basis of 
significant transactions. It talks about the approvals at 
various levels, and it says that in the timeframe at issue for 
the LJM transactions, new business in an amount greater than 
$35 million required board approval, correct? Do you know that 
that was the policy?
    Mr. Mintz. That sounds generally like the policy. I know 
the thresholds change.
    Ms. DeGette. I mean you wouldn't disagree that that was the 
policy, correct?
    Mr. Mintz. The threshold would change from time to time.
    Ms. DeGette. Okay. If you take a look at exhibit 26 in your 
notebook, that is the LJM approval sheets that we have been 
talking about. Chairman Tauzin was talking about some, and Mr. 
Stearns. Those are the LJM approval sheets which were not 
signed, most of them, by Jeff Skilling, correct?
    Mr. Mintz. The first one I am looking at, that is correct.
    Ms. DeGette. Now, you were very concerned that Mr. Skilling 
had not signed those sheets, correct?
    Mr. Mintz. From the beginning of the job, I was very 
concerned, as I did my due diligence, that the policies and 
procedures that the board had put in place weren't being----
    Ms. DeGette. Now, wait a minute. You were concerned that 
Mr. Skilling had not signed the sheets, and in fact you tried 
to get him to sign the sheets from time to time, even writing 
him a memo.
    Mr. Mintz. That requirement was part of the policies and 
procedures.
    Ms. DeGette. And you tried to get him to do it, yes or no?
    Mr. Mintz. That is correct.
    Ms. DeGette. Thank you. And did Mr. Skilling ever sign the 
sheets, that you know of?
    Mr. Mintz. I don't think so.
    Ms. DeGette. And do you know why he didn't sign the sheets?
    Mr. Mintz. I don't know.
    Ms. DeGette. And did you ever go to any of the board 
members, Mr. Winokur or others, and tell them of your concerns, 
that Mr. Skilling had not signed these sheets?
    Mr. Mintz. I didn't, Congresswoman.
    Ms. DeGette. Why not?
    Mr. Mintz. In an organization like Enron, I try to work 
within the system and report to people who are senior to me who 
I felt had the direct responsibilities with the board.
    Ms. DeGette. Okay. Did you ever report to your people who 
were senior to you of your concerns that Mr. Skilling had not 
signed these sheets?
    Mr. Mintz. I did.
    Ms. DeGette. Who was that?
    Mr. Mintz. It was Mr. Buy and Mr. Causey.
    Ms. DeGette. Mr. Buy and Mr. Causey, you said, ``I am 
concerned Mr. Skilling has not signed these sheets.''
    Mr. Mintz. That is correct.
    Ms. DeGette. What did they tell you they would do?
    Mr. Mintz. They told me to send a memo or get with Mr. 
Skilling and see if he wanted to get a whole packet of 
documents or----
    Ms. DeGette. And you did send a memo, right?
    Mr. Mintz. Yes, Congresswoman.
    Ms. DeGette. Did you get with Mr. Skilling?
    Mr. Mintz. I did not.
    Ms. DeGette. Why not?
    Mr. Mintz. Mr. Skilling didn't respond to my memo. I then 
asked my assistant to call his secretary to see if I could get 
on his schedule, and made two calls----
    Ms. DeGette. And you never got on his schedule. Did you 
then go back to your superiors and tell them Mr. Skilling never 
met with you or did you just drop it?
    Mr. Mintz. I just dropped it. I told----
    Ms. DeGette. Thank you.
    Mr. Mintz. Yes.
    Ms. DeGette. Now, you started in your current position in 
October----
    Mr. Greenwood. Mr. Mintz, did you feel like you didn't get 
a chance to respond to that?
    Mr. Mintz. Yes. I had----
    Ms. DeGette. Mr. Chairman, I would ask unanimous consent 
for an additional 30 seconds in that case----
    Mr. Greenwood. You will have it, you will have it.
    Ms. DeGette. [continuing] to finish my questioning. Thank 
you.
    Mr. Mintz. I did mention it to Mr. Causey and Mr. Buy.
    Ms. DeGette. And what did they say they would do?
    Mr. Mintz. They said, ``You tried and--''
    Ms. DeGette. They said they would try to get him----
    Mr. Mintz. No, no. They said, ``You tried, and leave it at 
that.''
    Ms. DeGette. So they said, ``You tried, and oh well.'' And 
you took nothing further with it.
    Mr. Mintz. That is correct.
    Ms. DeGette. Okay. Now, you started with your current 
position in October of 2000, correct?
    Mr. Mintz. Yes.
    Ms. DeGette. And in December of 2000, you sent a memo to 
Rick Buy and to Mr. Causey about the LJM3 Limited Partnerships, 
kind of outlining the different criteria you thought would be 
important, right?
    Mr. Mintz. Well, I summarized what I had seen in the PPM 
for them.
    Ms. DeGette. And you were concerned, weren't you, about 
issues of conflict of interest with--go ahead.
    Mr. Mintz. Again, I wasn't a securities attorney. I didn't 
deal with PPMs that often, but there were issues here that 
caught my eye that I thought people should be aware of.
    Ms. DeGette. And those issues were what?
    Mr. Mintz. The sales pitch.
    Ms. DeGette. And that was in December of 2000, right?
    Mr. Mintz. That is correct.
    Ms. DeGette. And on March 8, 2000, exhibit 13 in your 
notebook, you sent another memo to Mr. Buy and Mr. Causey 
talking about the LJM approval process and talking about issues 
regarding Jeff Skilling and others--I am sorry, Mr. Fastow and 
Mr. Kopper having conflicts, correct?
    Mr. Mintz. I summarized my due diligence for Mr. Buy and 
Mr. Causey regarding----
    Ms. DeGette. So during that period, October through, say, 
June, when you hired Fried Frank, you were concerned about 
conflicts of interests that Mr. Fastow and Kopper would have 
had.
    Mr. Mintz. I was concerned that the process and the 
procedures that had been put in place by the board weren't 
being adhered to to the level that I thought would substantiate 
arms-length dealing and fairness.
    Ms. DeGette. And you talked to Mr. Buy and Mr. Causey about 
those concerns, correct?
    Mr. Mintz. That is correct.
    Ms. DeGette. Did you ever bring those concerns to anyone on 
the board?
    Mr. Mintz. No, I didn't.
    Mr. Greenwood. Time of the gentlelady has expired.
    Ms. DeGette. Thank you.
    Mr. Greenwood. The Chair recognizes the gentleman from 
North Carolina, Mr. Burr.
    Mr. Burr. Mr. McMahon, Mr. Mintz, let me ask you a couple 
of quick questions, just yes or no. Either of you aware of any 
direction of Enron management for document destruction within 
Enron at any point?
    Mr. McMahon. If I understand your question, is any 
direction related to document destruction?
    Mr. Burr. Did any person within management at Enron 
instruct employees to destruct documents?
    Mr. McMahon. No, quite the opposite. There were several e-
mails sent out from our general counsel's office requesting 
people not to destroy certain types of documents and ultimately 
not to destroy any documents.
    Mr. Burr. Mr. Mintz, you were general counsel, what actions 
did you take?
    Mr. Mintz. I made sure that the people in the Global 
Finance Group had received the e-mails that were sent out from 
our general counsel's office.
    Mr. Burr. Those e-mails were dated 10-25, the first one, if 
I am correct. The SEC inquiry actually took place on October 
17. Can either of you fill in what transpired within Enron 
management in those 8 days between the SEC inquiry and this 
decision to put out a document preservation memo?
    Mr. McMahon. At the time, that would have been handled by 
the general counsel's office prior to my becoming CFO of the 
company, so I am not aware of what went on at that point in 
time.
    Mr. Burr. Any light you can shed on that, Mr. Mintz?
    Mr. Mintz. No, Congressman.
    Mr. Burr. Mr. Mintz, let me go back to your decision to 
hire outside counsel. I just need some clarification.
    Mr. Mintz. Yes, sir.
    Mr. Burr. Enron hired outside counsel through you or you 
personally hired outside legal counsel?
    Mr. Mintz. I hired outside legal counsel on behalf of the 
company as its client.
    Mr. Burr. On behalf of the company as its client. And your 
primary reason for that was what?
    Mr. Mintz. As I mentioned before, this Enron/Wind deal 
concerned me because of the magnitude, and it was different 
than apparently the transactions that were engaged in before 
LJM. Also the issues regarding some of our disclosures 
continued to gnaw at me, and I wanted somebody to take a fresh 
look at that.
    Mr. Burr. Who above you in Enron management did you share 
with the fact that you had hired outside counsel to look into 
this?
    Mr. Mintz. At that time, nobody, Mr. Congressman.
    Mr. Burr. You would have answered to Mr. Derrick at that 
time?
    Mr. Mintz. On the legal side, that is correct.
    Mr. Burr. And did any conversations that took place between 
you and Mr. Derrick prior to your decision to hire outside 
counsel lead you to believe you needed to hire outside counsel?
    Mr. Mintz. Mr. Derrick is a gentleman of the highest ethics 
and integrity, but I had brought--I was down on the 20th floor; 
Jim was on the 50th floor.
    Mr. Burr. Am I safe to assume from that answer that the 
points that you might have raised with Mr. Derrick were on deaf 
ears?
    Mr. Mintz. I don't think he appreciated the 
dysfunctionality that I observed on a regular basis.
    Mr. Burr. You are still extremely too kind. Mr. McMahon, 
you were involved in the Chewco buyout, weren't you?
    Mr. McMahon. Not directly, because it----
    Mr. Burr. You had knowledge of it.
    Mr. McMahon. I had knowledge of the proposal to actually 
buy out Chewco in early 2000. My understanding is it actually 
got bought out in 2001.
    Mr. Burr. You had originally signed off on a deal that 
would have profited someone a million dollars to Chewco, 
correct?
    Mr. McMahon. My group actually proposed the transaction to 
Mr. Fastow in order to essentially unwind the JEDI partnership 
where Chewco was the other investor. We proposed the 
transaction to simplify the capital structure of the company. 
And, yes, the proposal to Mr. Fastow was that we would 
recommend to spend $1 million to buy out the Chewco equity in 
JEDI.
    Mr. Burr. And, in fact, when that deal came back it was 
over $10 million.
    Mr. McMahon. That is how I understand it from the Special 
Committee report. It happened approximately a year after I 
moved out of the treasurer role.
    Mr. Burr. Can you shed any light on who it would take 
within Enron during that period to approve such a large 
difference between the proposal that you apparently had some 
financial basis to come up with and in fact a number that was 
10 times larger?
    Mr. McMahon. Well, I wasn't party to the actual 
negotiations that Mr. Fastow had with the Chewco investors, but 
as far as the approval goes, I actually am not certain within 
the company who would have that authority.
    Mr. Burr. Would it take Mr. Skilling?
    Mr. McMahon. I don't know.
    Mr. Burr. At what level does a decision to execute a buyout 
like this require?
    Mr. McMahon. That would go through our capital expenditure 
policy, and this is a $10 million payment, so I am just 
unfamiliar with what level of management.
    Mr. Burr. Could this transaction have taken place and Mr. 
Skilling not have known?
    Mr. McMahon. I don't know.
    Mr. Burr. Was Mr. Fastow involved?
    Mr. McMahon. Well, the discussions I had in 2000 about our 
recommendation to buyout Chewco, Mr. Fastow was very involved. 
He listened to our recommendation, understood the proposal of a 
million dollar buyout. Then he said he would personally handle 
the negotiations with Mr. Kopper.
    Mr. Greenwood. The time of the gentleman has expired.
    Mr. Burr. Note that that is significantly different than 
what he suggests his involvement was, which was none. I thank 
the Chair.
    Mr. Greenwood. The Chair recognizes the gentleman from 
Illinois, Mr. Rush, for purposes of inquiry.
    Mr. Rush. Thank you, Mr. Chairman. Mr. McMahon, I want to 
determine, are you currently--you are still currently 
affiliated with Enron, is that right?
    Mr. McMahon. Yes. As of last week, I am the president and 
chief operating officer of the company.
    Mr. Rush. President and chief operating of the company. 
Well, then, let me ask you this question: This week it was 
mentioned--noted that Mr. Buy and Mr. Causey would leave Enron. 
Is that the case?
    Mr. McMahon. I believe right now Mr. Buy and Mr. Causey are 
both current employees of Enron. The board convenes next week 
to deliberate on any type of actions they plan to take with 
respect to the results of the Special Committee report.
    Mr. Rush. Okay. And so are they in fact, as was indicated 
earlier, are they negotiating some kind of severance package?
    Mr. McMahon. Currently, I believe, where it stands, 
Congressman, is no action has been taken either way. Neither 
employee to date has resigned. As of to date, the company has 
not terminated, to the best of my knowledge, and the decision 
has really been undertaken by the board on what action to take, 
which will--as I understand it, they will meet next week to 
talk about that.
    Mr. Rush. Well, can you describe for the committee any 
severance packages that they might be eligible for?
    Mr. McMahon. I think, basically, due to the bankruptcy, I 
don't believe that, as of right now, they are eligible for any 
severance package that was any different than any of the other 
severed employees. But, again, that is a matter for the board, 
not for myself.
    Mr. Rush. Okay. So are you saying that Enron does have an 
existing policy that would determine severance packages in the 
event of bankruptcy?
    Mr. McMahon. That is technically a little bit different. We 
had an existing policy that, as I understand it, was terminated 
as a result of the bankruptcy, and therefore we are limited to 
severance payments that are sanctioned by the bankruptcy court.
    Mr. Rush. Well, then does Enron have a policy that officers 
who have breached their fiduciary responsibility to the company 
or are being terminated for cause, that they must forfeit their 
severance pay, severance package?
    Mr. McMahon. I am not aware of a policy one way or another 
with respect to that.
    Mr. Rush. So would you--do you have any role in terms of 
making recommendations to the committee?
    Mr. McMahon. No. These are two senior officers of the 
company that were elected by the board of directors, and the 
board of directors will take the appropriate action they deem 
necessary.
    Mr. Rush. Mr. Olson, yesterday we heard some lengthy 
testimony from Mr. Chanos about short sellers, that for some 
time they had concern regarding Enron's overstated stock value. 
These analysts noted Enron's confusing disclosures and related 
party transactions. They also noted the constant selling of 
stock by insiders. Give us a panoramic view of the industry. Is 
this common in the industry?
    Mr. Olson. I would be glad to. In my opinion, Enron way 
back when, when Mr. Chanos presumably was referring to it, when 
the stock was $80 or $90, it was gloriously overvalued, in my 
opinion. You had an era of really good feelings. The stock was 
up 88 percent in the year 2000, and everybody seemed to be out 
there recommending it. But no one had really been out there 
connecting all the dots. There was always a reason that some of 
the selling was going on, that one person was going to retire 
and move to Colorado, one person was going to go off and do 
something else. But I think over 18 months, it turned out that 
about 68 members of top management left by September 30, 2001. 
We didn't have all the different pieces to put together. We did 
not have the off-balance sheet financings. Those really became 
apparent when the Wall Street Journal got a hold of these 
partnership documents on LJM, I think, on October 17 or so, or 
somewhere around that time and revealed just some of the 
shenanigans going on.
    There was a great fan club of Enron on Wall Street because 
of its tremendous stock market success. Everybody sensed, in my 
opinion, that they didn't understand it. I know I didn't 
understand the company very well. I had been covering it for 
its 15-year horizon, but you couldn't really get past the 
cosmetics. This company had gone from $13 billion of assets in 
1994 to $65 billion 5.5 years later. It had taken its revenue 
base from $95 billion in the year 2000. It was headed toward 
$200 billion in 2001. By most measures, it was a great success, 
but on the other hand, Mr. Chanos and the short sellers were 
quite right, the stock was way overvalued, and it was coming 
down. With all due credit to him, I would tell you I think he 
was as lucky as he was smart.
    Mr. Greenwood. The time of the gentleman from Illinois has 
expired. The Chair recognizes the gentleman from New Hampshire, 
Mr. Bass, for 5 minutes.
    Mr. Bass. Thank you, Mr. Chairman. Mr. Burr asked you--Mr. 
Mintz, Mr. Burr asked you a minute ago about meeting with Jim 
Derrick who was Enron's general counsel, and you responded, as 
I recall, that you met with him several times about your 
concerns over LJM, correct?
    Mr. Mintz. I started a process in meeting with Jim after I 
had completed my due diligence to keep him abreast of what was 
going on related to LJM. I didn't feel that he had an 
appreciation up on the 50th floor.
    Mr. Bass. Was there a situation where Fastow and Kopper 
came to you to complain about Enron's attorneys negotiating on 
behalf of Enron about LJM? Was there a discourse there that you 
are aware of?
    Mr. Mintz. There was a situation just when I began the job 
in October that almost immediately one of the senior attorneys 
brought to my attention that the buzz on the floor was that one 
of our attorneys was being fired. When I started the job, Mr. 
Kopper and Mr. Glisan came to me and told me that they wanted 
me to fire a particular attorney. I said, ``You just hired me. 
Let me do my job. Let me make my own assessment.''
    Mr. Bass. Why was that? Why was that?
    Mr. Mintz. That they felt that he was unresponsive on a 
transaction.
    Mr. Bass. Involving LJM?
    Mr. Mintz. That is correct.
    Mr. Bass. Is it your understanding that Mr. Fastow left 
this lawyer of a voice mail message or any kind of 
communication, and what was the nature of that?
    Mr. Mintz. Well, I wanted to understand the facts that 
triggered all of this. I met with my colleague, and he told me 
his view of what happened, and he had told me during the 
process of the negotiations that he did receive a voice mail 
from Andy, from Mr. Fastow.
    Mr. Bass. Did he describe the nature of that voice mail 
message?
    Mr. Mintz. What I read in the papers, I think, was 
accurate; it was expletive-laced.
    Mr. Bass. I see. One quick question for you, Mr. Olson, 
then I would like to yield the balance of my time to the 
chairman of the committee. Just in general, and it may be--the 
answer may be obvious, but in your opinion, would any investor, 
anybody, even a brokerage firm that was not inside the 
corporation, be able to determine that there was any problem 
with Enron's accounting practices and the partnerships and 
generally the whole discussion that we have been having today?
    Mr. Olson. I am afraid to say that that is correct. From 
the outside looking in, you could not go beyond the accounting 
cosmetics that you would like to, but how do you--when they had 
$7.5 billion global assets out there, assets in India, Turkey, 
Sicily, you had no idea, they had over 2,500 subsidiaries, and, 
again, it was almost impenetrable, and I think that Enron was 
able to game us in that sense. We were increasingly reliant 
upon their judgment as to where their earnings trends were 
going.
    Mr. Bass. Thank you.
    Mr. Greenwood. The Chair thanks the gentleman for yielding. 
Mr. McMahon, would you turn in your document folder to Tab 10? 
And while you are doing that, let me indicate that the entire 
binder of documents that has been distributed to the members, 
without objection, will be made a part of the record.
    Tab 10, Mr. McMahon, is the March 2000/April 2000 your 
calendar. Do you have that document?
    Mr. McMahon. Yes, I do.
    Mr. Greenwood. Okay. Let me ask you this question: Did you 
ever discuss your concerns regarding the LJM situation with 
other officers at Enron?
    Mr. McMahon. Yes. I had frequent conversations, well, you 
say other officers, beginning with Mr. Fastow.
    Mr. Greenwood. In looking at your calendar, perhaps you 
could help us develop a chronology----
    Mr. McMahon. Oh, sure.
    Mr. Greenwood. [continuing] and we will come back to this.
    Mr. McMahon. On March 6, there was a social event where I 
met with Mr. Baxter that evening, who is one of the----
    Mr. Greenwood. And Mr. Baxter is, identify him, please.
    Mr. McMahon. Cliff Baxter was, at the time, one of the vice 
chairmen of the company. We had a conversation about the 
variety of conflicts that the LJM matters were----
    Mr. Greenwood. And how did Mr. Baxter react to your 
concerns?
    Mr. McMahon. He was aware of the conflicts as well as I 
was. He encouraged me to go see Mr. Skilling directly.
    Mr. Greenwood. You said he was aware. Did he indicate to 
you that ``This is bad, this is wrong, we need to do something 
about this,'' or did he just say, ``Hey, if that is bothering 
you, go see Skilling.''
    Mr. McMahon. Well, there was a little bit of 
acknowledgment. I think it was widely known that the conflict 
existed. I mean, again, it----
    Mr. Greenwood. This was a big dead elephant in the center 
of the room, right?
    Mr. McMahon. I think it was widely known among frankly 
all--several layers of management about the conflicts. I 
explained to him personally how they manifested within my 
group. His suggestion to me was nothing probably will get 
resolved unless----
    Mr. Greenwood. I am going to run out of time. You took your 
concerns to Skilling.
    Mr. McMahon. Correct, and I----
    Mr. Greenwood. Can you show us on the calendar when you did 
that?
    Mr. McMahon. Yes. On the calendar, there is a meeting with 
Mr. Skilling on March 16. But, actually, the day before that, 
on March 15, you see a meeting with Mr. Fastow where I----
    Mr. Greenwood. Let us go 1 day before that, to the 14th, 
with Mr. Greg Waley?
    Mr. McMahon. Right, Mr. Waley.
    Mr. Greenwood. What was that about?
    Mr. McMahon. At that point in time, Mr. Waley had 
approached me about moving internally. He was also one of the 
senior members of management I had spoken to about my concern, 
and he knew I was unhappy in my current role. So he suggested 
that I move into the group he was now heading up.
    Mr. Greenwood. Did you turn him down?
    Mr. McMahon. I ultimately did turn him down. It was 
probably several days from that meeting, but it was not an 
internal move at the time I was willing to make.
    Mr. Greenwood. And then--I will yield after this--but on 
the 16th, you met with Skilling in his office, according to 
your calendar, at 11:30. Could you describe that meeting for 
us?
    Mr. McMahon. Yes. That meeting was about a 30-minute 
meeting where I sat down with Mr. Skilling and----
    Mr. Greenwood. Did you make notes at that meeting?
    Mr. McMahon. I did make notes at the meeting, actually 
prior to going into the meeting.
    Mr. Greenwood. Do those notes at Tab 9 reflect the notes 
from that meeting?
    Mr. McMahon. Yes. These are the two pages of an outline, a 
talking outline that I took into the meeting with me.
    Mr. Greenwood. Tell us what this committee can learn from 
your notes.
    Mr. McMahon. Essentially, the notes on the meeting, which 
was really, again, my talking points, were that the LJM 
situation had gotten to basically a point that was just 
untenable for myself and my group. We found ourselves 
negotiating against people who represented LJM. They were Enron 
employees. Andy Fastow was the ultimate senior person that all 
those people reported to. He set compensation and promotion----
    Mr. Greenwood. I am out of time, and in respect for my 
colleagues----
    Ms. DeGette. Mr. Chairman? I would ask unanimous consent 
that you grant 2 additional minutes to the gentleman and yield 
to me to follow-up on your questions about these notes. I think 
this is an important line of questioning, and I have got the 
notes in my hand.
    Mr. Bass. I have no objection to that, Mr. Chairman. My 
time is expired, though.
    Mr. Greenwood. Well, I would yield the gentleman 2 
additional minutes with unanimous consent, and I would be happy 
to have you yield them to me, and I will finish the line of 
inquiry.
    Mr. Bass. That is fine. I will yield to the distinguished 
chairman.
    Mr. Greenwood. And I will be generous with the time of the 
gentlelady from Colorado as well.
    Now, your notes, sir, do they reflect in fact what you 
discussed with Mr. Skilling or did they reflect what you 
intended to discuss with Mr. Skilling? Did you in fact discuss 
the points that are reflected in your notes?
    Mr. McMahon. Yes. I would characterize that my notes 
reflect both. This was what I intended to discuss when I----
    Mr. Greenwood. You made these notes before you entered the 
meeting or during the meeting?
    Mr. McMahon. Before I walked in the meeting, these notes 
were made as a talking outline for me.
    Mr. Greenwood. And what was Mr. Skilling's reaction to your 
discussion with him?
    Mr. McMahon. Mr. Skilling listened to my concerns. I went 
through a variety of conflict matters and asked him to do one 
of two things: Either remedy the situation----
    Mr. Greenwood. What were the conflicts that you raised, how 
did you phrase it?
    Mr. McMahon. I said there were several conflicts that I 
thought he needed to be aware of that were going on because of 
this. The Enron employees were negotiating against LJM 
representatives, and yet they all reported to Mr. Fastow. I saw 
that as a major conflict. Mr. Kopper----
    Mr. Greenwood. How did he react to that?
    Mr. McMahon. Throughout the meeting he pretty much 
listened, not a lot of----
    Mr. Greenwood. You read body language pretty well, do you, 
facial language? Did he look like, ``Oh, horrors, I didn't know 
this'' or did he look like, ``Yes, yes, I know.''
    Mr. McMahon. He didn't have much of a reaction, frankly.
    Mr. Greenwood. He was kind of stone-faced about this. You 
couldn't read him.
    Mr. McMahon. I could not read him, that is a fair 
assessment.
    Mr. Greenwood. You walked out of the room and you thought 
to yourself, ``Hmm.'' What did you think? Did you think--what 
did you think? You couldn't read him, but what did you think?
    Mr. McMahon. Well, his parting words to me were that he 
understood all my concerns and that he would remedy the 
situation.
    Mr. Greenwood. My time has expired. The Chair recognizes 
the gentleman from Louisiana, Mr. John.
    Mr. John. Thank you, Mr. Chairman. I am going to get back 
to that point here real quick. A lot of my questions have been 
answered, except something sticks in my mind that is very 
fascinating with Mr. Mintz' situation. It is fascinating to me 
that you, as the general counsel of Enron, would go outside 
your department, and I assume you paid a nice little fee to 
Vinson & Elkins to be your in-house attorneys, and to go 
outside it is fascinating to me. Why would you do that? I think 
you shed a little bit of light, but I don't think you went far 
enough to satisfy at least some of my curiosities. Did Vinson & 
Elkins have anything to do with the structuring of these 
partnerships?
    Mr. Mintz. Congressman John, I think they were involved in 
many of the transactions as----
    Mr. John. Actually setting them up or providing legal 
advice on how to structure them?
    Mr. Mintz. I think it really related to legal advice 
regarding whether true sales opinions needed to be obtained, 
not so much the structure but rather what were the requirements 
from a legal perspective in order to reach the accounting 
objective?
    Mr. John. And that is what concerned you about the 
conflicts of interest.
    Mr. Mintz. Well, not so much the substantive aspects of the 
transaction. I was just concerned with something larger about 
the whole LJM relationship, and I wanted somebody to help me 
think through it.
    Mr. John. So in June 2001, you hired Fried Frank, correct?
    Mr. Mintz. Congressman, I think it might have been the 
month before, but that is correct.
    Mr. John. Okay. Yes, you had answered that earlier. And 
during the line of questioning with one my colleagues, we were 
getting to the fact of what came out of their investigation. 
How long--two-sided question: Give us a little synopsis of what 
their findings were, (a), and then, (b), it seems like in your 
conversation and in my notes that the relationship stopped all 
of a sudden with you and Fried Frank. Give us a little input 
about what their findings were and why they stopped?
    Mr. Mintz. If I may take even a step further back. When I 
approached----
    Mr. John. Can you push the microphone a little bit closer?
    Mr. Mintz. When I approached Fried Frank, it was really to 
focus on two different issues: One, this larger issue of the 
relationship, the related party relationship with LJM and what 
were their views about it; and then, second, I had lingering 
concerns about the disclosures that we had made in the proxy, 
and I asked them to review our disclosures. Almost immediately 
we had phone conversations thinking about the process. They 
were telling me the type of research that they were going to 
do, and we had an ongoing dialog. I provided them with some 
additional documentation along the way.
    About a week or 10 days into their research and their 
review, Mr. Fastow, Andy, brought to my attention that he was 
working with his law firm, Kirkland & Ellis, to try to 
restructure his interest to reduce it below the threshold that 
it would no longer constitute a related party transaction. I 
think Arthur Andersen at that time told him that if he had any 
interest at all in the partnership, he would still be 
considered to be a related party, and they would have to 
disclose it. He came back and told me that he was going to sell 
his entire interest in the partnership.
    And I was sort of elated by that news, because it was going 
to go away and presumably a lot of the dysfunctionality was 
going to go away. So when I brought that to Fried Frank's 
attention, I asked them could they change their focus somewhat 
and help me think through about what is the best way to 
terminate the interest and to clean things up, if you will.
    Mr. John. When and with whom did you share any of this 
information about bringing in an outside firm? Did any of the 
top management know or did you, at any point in time after 
this, share with them what you were doing?
    Mr. Mintz. I did. The most important thing that I gleaned 
from the advice from Fried Frank was, ``Although the 
disclosures probably pass muster, here is an opportunity to 
sort of clean things up. So in the quarter that Mr. Fastow 
sells his interest, why don't you expand your disclosures in 
the 10-Q, and then when you go ahead and file your proxy in the 
following year, why don't you make a more expansive disclosure 
at that time?''
    And I had--I think it was sometime in August when we were 
starting to think about the--well, the problem was Mr. Fastow--
it lingered until he sold his interests. So instead of it being 
the second quarter, it turned out to be the third quarter, as 
we started getting ready to think about preparation of the Q. I 
had discussions with one of our senior securities attorneys 
about making a fuller disclosure.
    Mr. John. Okay. My time is running out. I got one more----
    Mr. Greenwood. The Chair would ask unanimous consent for 
the gentleman to have an additional 2 minutes of time and would 
note that if he would like to yield that to his colleague, Ms. 
DeGette, that would be consistent with my----
    Mr. John. I will be glad to. I have got two more very, very 
quick questions. First of all, Mr. Mintz, another fascinating 
aspect of this is the signing of this document. Is there any 
doubt in your mind that Mr. Skilling was never aware of these 
transactions? Is that why maybe he didn't want to sign them?
    Mr. Mintz. No, I don't think that is the case.
    Mr. John. You think he knew all about them.
    Mr. Mintz. Certainly the majority of them, I do.
    Mr. John. Okay. And, finally, we were getting down to Mr. 
McMahon's--to maybe the crescendo of this meeting he had with 
Mr. Skilling about what all happened. And as you walked out, he 
said that he is going to try to fix this. But isn't it true 
that you also shared a lot of the concerns with Mr. Causey, Mr. 
Buy, Mr. Lay and Mr. Sutton, and not one of them helped you or 
gave you advice, other than maybe just, ``Get out of the way.'' 
In fact, you even told some of the committees that you told Mr. 
Sutton that Mr. Fastow could make as much as $15 million. Is 
that true?
    Mr. McMahon. Yes. When I met with Mr. Sutton, which 
actually was after Mr. Skilling's meeting, apparently, 
according to Mr. Sutton, Mr. Skilling delegated the 
responsibility to Mr. Sutton, who was also vice chairman of the 
company, to deal with my issue that I had raised in the 
previous meeting. And it was at that point in time Mr. Sutton 
was asking me about what type of compensation one could get 
from this type of fund, and I explained to him, based on the 
math as I knew it, which was standard, private equity could be 
somewhere at $10 million to $20 million per year.
    Mr. John. And final, maybe a comment, maybe not. When 
things got so bad you finally gave Mr. Skilling an ultimatum, 
you either had to fix this or get a new job, and it was very 
fortunate for you that there was another job waiting for you. 
And as you left Mr. Skilling's office, not much time has passed 
before Mr. Fastow had called you and said, maybe I can 
paraphrase it, ``We have got a new job for you. The pay is the 
same, but you have a new job.'' Can you comment on that?
    Mr. McMahon. Actually, the process was a little bit 
different. I actually had a long discussion with my wife before 
I even walked into Mr. Skilling's office, because I knew the 
potential ramifications. Mr. Fastow, actually, did not suggest 
I take a new job; in fact, quite the opposite. About a week or 
two later, he called me in and suggested that he was unclear 
whether he and I could continue to work together.
    Mr. John. Mr. Fastow.
    Mr. McMahon. Mr. Fastow, who was my boss. It was hours 
after that meeting when Mr. Skilling advised me that he thought 
there was a much better job in the company for me and that I 
should seriously consider taking it.
    Mr. John. And I will yield the balance of my time to the 
lady----
    Mr. Greenwood. The gentleman has consumed all 3 of the 2 
minutes that was yielded to him.
    The Chair asks unanimous consent that the Chair be granted 
an additional 2 minutes and then yields that to the gentlelady 
from Colorado.
    Ms. DeGette. Thank you for you comity, Mr. Chairman. Let me 
follow-up, Mr. McMahon, on Mr. John's question. Why did you 
think you were being transferred within the company?
    Mr. McMahon. Maybe naively at the time I certainly believed 
Mr. Skilling when he told me that he thought I would be better 
able to use my skillsets elsewhere in the organization at a new 
startup group related to e-commerce.
    Ms. DeGette. Now, in March and April of 2000, what was your 
title with the company?
    Mr. McMahon. In March of 2000, I was treasurer of Enron 
Corp.
    Ms. DeGette. You were treasurer of Enron Corp. And, as 
such, you owed a fiduciary duty to Enron Corp. at that point, 
correct?
    Mr. McMahon. I believe that is correct.
    Ms. DeGette. And, as we have been discussing here, you had 
this meeting with Mr. Skilling. These are your notes, exhibit 
9. I think it bears hearing some of the things you said: 
``Untenable situation, LJM situation where AF wears two hats, I 
find myself negotiating with Andy''--I assume that was Fastow.
    Mr. McMahon. That is correct.
    Ms. DeGette. ``On Enron matters and am pressured to do''--I 
can't read the--do you have those in front of you?
    Mr. McMahon. I do.
    Ms. DeGette. ``And am pressured to do--''
    Mr. McMahon. ``A deal.''
    Ms. DeGette. ``A deal that I do not believe is in the best 
interest of the shareholders.'' That is what you wrote in your 
notes, in March of 2000, right?
    Mr. McMahon. That is correct.
    Ms. DeGette. And did you talk about that with Mr. Skilling 
in the meeting?
    Mr. McMahon. I did talk about that with Mr. Skilling.
    Ms. DeGette. And what was his response?
    Mr. McMahon. Again, he was--as I said earlier, he was hard 
to read. He actually didn't have a response.
    Ms. DeGette. So he didn't say anything when you said, ``I 
do not believe it is in the interest of the shareholders,'' 
right?
    Mr. McMahon. That is correct.
    Ms. DeGette. And then you have here, ``Request options. My 
integrity forces me to continue to negotiate the way I believe 
is correct,'' right?
    Mr. McMahon. Correct.
    Ms. DeGette. And then you said, ``In order to continue to 
do this, I must know I have support from you.'' Did you say all 
that to Mr. Skilling?
    Mr. McMahon. I did say that to Mr. Skilling.
    Ms. DeGette. Now, after that meeting, in March 2000, 
nothing really changed, did it?
    Mr. McMahon. With the structure? My job changed.
    Ms. DeGette. Yes, okay. They moved you to another job. But 
as far as you know, the LJM situation that you were so 
concerned about never changed, did it?
    Mr. McMahon. As far as I know. I really don't know what 
happened. My new job took me away----
    Ms. DeGette. Well, were you worried about the LJM situation 
after that? I mean you were a fiduciary of the corporation at 
that point.
    Mr. McMahon. That is correct, and I spoke to Mr. Skilling 
who was a board member, as well as Mr. Sutton, after that, who 
was a vice chairman, who both indicated to me that they would 
resolve these problems.
    Ms. DeGette. But they never--so you never took any further 
duty to see if the problems were resolved, did you?
    Mr. McMahon. Well, after that I had different 
responsibilities with the company.
    Ms. DeGette. Okay. But the answer is no, you didn't take 
any additional duty. You just said, ``Well, I am transferred, 
so it is not my problem any more,'' right? Pretty much?
    Mr. McMahon. I don't think that is a fair characterization, 
frankly.
    Ms. DeGette. Did you ever talk to any board members about 
this?
    Mr. Greenwood. The time of the gentlelady has expired.
    Mr. McMahon. Yes. Mr. Skilling is a board member.
    Ms. DeGette. Oh, okay. Thank you.
    Mr. Greenwood. The gentleman from Oklahoma has waited three 
and a half hours patiently for a question, and the Chair yields 
him 5 minutes.
    Mr. Largent. Thank you, Mr. Chairman. Mr. Bauer, I wanted 
to address my first question to you. In your opening statement, 
you talked about special purpose entities and some of the 
accounting parameters that have to apply to those. And some of 
those parameters dealt with the relationship between the parent 
company and the SPE.
    Mr. Bauer. Yes, sir.
    Mr. Largent. What are those parameters that have to be in 
place to qualify as an SPE?
    Mr. Bauer. Yes, sir. I identified in my comments two 
specific matters: One, that the 3 percent equity needed to be 
independent of Enron or independent of the sponsor of the SPE, 
and then also that the sponsor could not control the SPE.
    Mr. Largent. Okay. Given that definition, Mr. Mintz, I 
wanted to go--this issues checklist that is under Tab 26, that 
has been referred to, that you gathered several signatures 
minus Mr. Skilling, is that an issues checklist that you 
compiled or was that an Enron document that was just a standard 
blank document?
    Mr. Mintz. Congressman Largent, when I started my job in 
October 2000 in Global Finance, that LJM approval sheet and the 
issues checklist was already in place.
    Mr. Largent. Okay. That leads me to this question: Question 
4(c) that is on the second page of this document says, ``Have 
all Enron employees involvement in this transaction on behalf 
of LJM been waived by Enron's Office of the Chairman, in 
accordance with Enron's conduct of business affairs policy, yes 
or no?'' It seems to me that the very question is stating that 
it is violating one of the parameters that has to be in place 
to qualify as a special purpose entity, is it not? I mean that 
Enron just routinely waived this arms-length understanding to 
qualify for an SPE. But it is on a standard form, this isn't a 
handwritten note. This is a standardized form saying that ``We 
waive that parameter, that restriction.''
    Mr. Mintz. Congressman Largent, I was very troubled with 
the checklist when I came into the job and shared that with Mr. 
Buy and Mr. Causey in a memo that I wrote to them a couple 
months into the job.
    Mr. Largent. Mr. McMahon, I want to ask you, and a couple 
of other members, and this is my last question, a question. And 
this is an opinion, this is a subjective question; I understand 
that. But as I mentioned in my opening statement, the issue 
before this committee, we are not--we should not be, although I 
think that it is carrying a tone of being prosecutorial, that 
is the Justice Department's responsibility, not Congress'. We 
are trying to figure out are there some things that we need to 
do to ensure that this doesn't happen again. My question, Mr. 
McMahon, is this: In your opinion, are other businesses 
practicing in this way that Enron has been the subject of this 
hearing? Are other businesses participating in this same sort 
of practice, the accounting gymnastics and all of the things 
that were going on with SPEs in an effort to fool Wall Street 
and analysts? Is that commonplace?
    Mr. McMahon. Congressman, I am really unable to respond how 
other businesses operate.
    Mr. Largent. I am asking for your opinion. I mean you talk 
to people that work at Dynegy or other companies, whether it 
is--whoever it is. Are other businesses conducting themselves, 
in your opinion--this is an opinion, this is subjective--are 
they doing the same thing that you all were doing?
    Mr. McMahon. I am afraid I really can't give you an opinion 
on that, because I don't know enough----
    Mr. Largent. How about Mr. Mintz, do you have an opinion? 
Do you think this is commonplace or is this an anomaly?
    Mr. Mintz. He is the president of the company, I think I am 
going to have to defer to him.
    Mr. Largent. Okay. Mr. Olson, how about you? Your business 
is to look at these companies inside and out. Is this a common 
practice or is Enron an anomaly?
    Mr. Olson. Congressman, the conventional asset structures 
that Enron used are very commonplace. General Electric, banks, 
credit card companies and so forth use these kind of structures 
very conventionally. What Enron did was to mutate that 
structure into something virtually unrecognizable and used this 
SPE capital structure of 97 debt, 3 percent equity. Corporate 
America for the last 10 years has been about a 50/50 debt/ 
equity capital structure, and, in essence, Enron put a lot of 
basically LBOs with the stockholders at risk, put a lot of 
paper on their off-balance sheet financings, I want to say this 
way.
    We are about to find out, I am sure, about some of the 
other companies out there. I don't know if any others among 
Enron's competitors who went anywhere to this degree. I have to 
say that when you deal with derivatives they are like hand 
grenades or land mines or something. JP Morgan Chase, for 
instance, just found out about that the hard way. That is my 
opinion.
    Mr. Largent. Okay. Mr. Olson, let me just list one final 
question. I guess the issue that is before us, and I think most 
people--the question is, is this a case--and this is important 
for this Congress to understand too--is this a case that we 
just got a bunch of bad actors that were bending the laws, if 
not breaking the laws? Is this a case where we need additional 
laws to tighten this up, to make sure that this thing does not 
happen without breaking the law? Or is it a combination of 
both?
    Mr. Olson. In my very unvarnished opinion, you definitely 
need to institute regulations at the SEC level or at the 
accounting level. Some of the SPE accounting and the capital 
structure, for instance, is highly, highly borderline from an 
equity and investor point of view. The accounting, as I 
mentioned in my speech or testimony earlier, is as flaky as one 
could ever see. Enron, as the saying goes, they rode the edge, 
they crossed the line, they have paid the price, and it is a 
terrible price.
    Mr. Largent. Thank you, Mr. Olson. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman. The Chair 
recognizes the gentleman from Ohio, Mr. Strickland, for 5 
minutes.
    Mr. Strickland. Thank you, Mr. Chairman. One of the things 
that I find fascinating about this particular committee is that 
people who appear before us take an oath. And I find it 
incredulous that there could be a meeting like the one that 
occurred between Mr. McMahon and Mr. Skilling with such 
important issues being discussed and that there would be no 
dialog. We have been told that he said nothing, and that seems 
like a rather strange meeting. Now, I think to say, ``I don't 
remember what he may have said,'' may be believable to me, but 
it is difficult for me to believe that you had this exchange 
with him, you shared these very important matters with him and 
that there was no response. Is that what this committee should 
believe or did he say something in response?
    Mr. McMahon. As I mentioned earlier, he let me walk through 
my talking notes, and at the end of the meeting Mr. Skilling 
indicated to me that he understood my concerns and he would try 
and remedy the situation.
    Mr. Strickland. So he did say something in response.
    Mr. McMahon. Yes. At the end of the meeting. I think I said 
that earlier.
    Mr. Strickland. And what he said, as you related to us, at 
this point, is that he understood or comprehended what your 
concerns were.
    Mr. McMahon. That is correct.
    Mr. Strickland. And that he would----
    Mr. McMahon. And that he would remedy the situation.
    Mr. Strickland. So he told you he understood the situation, 
the understood your concerns, and that he would remedy the 
situation.
    Mr. McMahon. That is correct.
    Mr. Strickland. And in all due respect, I think that is a 
different kind of response than perhaps we were led to believe 
that he gave before. What does a remedy mean, sir, in your 
judgment?
    Mr. McMahon. I took that to mean that he would--well, let 
me step back. Part of the solution here, I felt, a fairly 
easily mitigant to these conflict matters internally, was just 
some pretty simple restructuring. Take Mr. Fastow out of the 
performance review process, move some of these LJM 
representatives off the floor so they didn't have the 
proprietary information, et cetera, et cetera. So I thought 
they were fairly simple structural changes that could be made 
to mitigate this. And I took the ``remedy the situation'' 
meaning that he would investigate these and try and make those 
changes.
    Mr. Strickland. So you left the meeting with a personal 
conviction that you had been heard, that your concerns were 
understood and that there was a commitment to do something 
about them.
    Mr. McMahon. And I was even, further than that, encouraged 
by the next day when the vice chairman of the company called me 
and said that he had been relayed the meeting information and 
that he was now responsible for solving the problem.
    Mr. Strickland. Thank you. Mr. Olson, I think the 
question--maybe the most basic question facing the country and 
perhaps this committee is who knew what, and when did they know 
it? And many of the senior officers have told the staff 
interviews that they didn't know the train wreck was coming 
until October. And I am asking for your belief here now, 
understanding that you may not be able to back it up factually. 
But is it your belief that senior officers in this company knew 
that trouble was coming prior to October?
    Mr. Olson. In a word, yes.
    Mr. Strickland. If so, do you have any estimate as when 
they may have known that this was going to happen?
    Mr. Olson. In a word, no, but if I may qualify that. The 
turnover, the departure of stock sales and the like all were 
pointing to something bad happening. This is why this stock 
lost so much of its credibility, going from $90 a share down to 
the 40's when Mr. Skilling resigned when the stock was around 
$42.
    Mr. Strickland. What are some of the signs that these upper 
management folks may have been aware of?
    Mr. Olson. I think that they were continuing to provide 
very bullish forecasts of the future. Mr. Lay was out there 
saying that the future was never better. Mr. Skilling made 
similar kinds of comments, even at his departure.
    Mr. Strickland. But isn't it true that these individuals 
were dumping their stock? Is there any reasonable explanation 
for why someone would sell of so much stock at the same time 
they were painting a rosy picture and encouraging others to buy 
it? Can you think of any reasonable explanation for that?
    Mr. Olson. No, in effect. I mean we were massaged, if you 
will, by saying, well, these people here are going through a 
lifestyle change or someone is going to retire or leave and the 
like. But, again, it was a matter of connecting all the dots. 
We really didn't know that so-and-so was cashing in $353 
million. I mean we didn't--we were just too busy to ever add 
these kind of numbers up. And low and behold, when someone did 
that kind of dirty work, it was stunning. But no one really had 
connected the dots.
    Mr. Strickland. Which officers do you think may have had 
information that was unavailable to the board members and the 
stockholders?
    Mr. Olson. I would say that the rogue financing, rogue 
accounting operation that was underway there, there may have 
been--I am not qualified to tell you just how many people there 
were--this company had 245 lawyers, and you would think that we 
would have these checks and balances in there. But I would 
imagine anybody in the Fastow organization or directly 
reporting to him or in the Special Projects kinds of things had 
to know that they were using borderline accounting and highly 
leveraged transactions.
    Mr. Greenwood. The time of the gentleman has expired. The 
gentleman from California, Mr. Waxman, while not a member of 
the Oversight Committee, is a member of the full committee and 
is recognized for 5 minutes for inquiry.
    Mr. Waxman. Thank you very much, Mr. Chairman. Over the 
past 2 months, investigators on my staff have interviewed 
numerous former Enron employees. These interviews have given us 
a glimpse of how the company was run. The picture that emerged 
is one in which executives profited handsomely while the 
employees suffered. I would like to ask maybe Mr. McMahon this 
question. We have been told that many--this is in response to 
some of the allegations we have picked up from former Enron 
employees--we have been told that many Enron executives cashed 
in their deferred compensation plans last November after Dynegy 
made a $1.5 billion cash infusion into Enron at the time, the 
two companies were discussing a merger.
    The allegation is that the Enron executives cashed out 
because they would have lost all their deferred compensation 
money if the company went into bankruptcy. And according to 
information we have been told, Enron executives were draining 
the company's coffers right before the company went under. And 
even though these executives received less in deferred 
compensation than they were entitled, they got a lot more than 
thousands of average employees who lost their jobs and were 
given minuscule severance payments. Suspicion has been raised 
by others about how Dynegy's money was spent. Dynegy's CEO, 
Chuck Watson, was quoted in the New York Times as saying Enron 
had burned through over $1.5 billion in less than 3 weeks. 
Neither the treasurer nor the CEO could explain where the cash 
went.
    I would like to substantiate whether this was a significant 
activity in the deferred compensation plan. Do you know or did 
you personally--did you personally withdraw any or all of your 
deferred compensation funds?
    Mr. McMahon. No, I did not withdraw any, nor do I have any. 
The matter you are talking about I am not 100 percent familiar 
with. During that time period, I was appointed CFO late 
October. That matter would have been handled by our Human 
Resource Department, so, unfortunately, I don't have the facts 
with me on the deferred comp plan, but I would be happy to get 
back to the committee.
    Mr. Waxman. Do you know whether there were executives that 
were cashing out their deferred compensation plans before the 
bankruptcy?
    Mr. McMahon. My understanding is during that timeframe 
there were deferred compensation payment requests. I am not 
familiar with who or how much was disbursed.
    Mr. Waxman. Who at Enron would keep the records of deferred 
compensation withdrawals?
    Mr. McMahon. That would be in our Human Resource 
Department.
    Mr. Waxman. And I would like to request to the chairman 
that he be sure to subpoena copies of these records to see if 
there were these deferred compensations at the time we were 
told.
    I understand that companies keep track of the stock options 
owned and exercised by its employees. While Enron is required 
by the SEC to report all stock transactions involving officer, 
directors and major shareholders, it is not required to report 
transactions of other senior executives. Who at Enron keeps 
records of stock options and when they are exercised?
    Mr. McMahon. Again, that would be their Human Resources 
Department.
    Mr. Waxman. Well, I think it is important for this 
committee to determine whether senior executives profited from 
insider knowledge about Enron's financial situation, and I 
would also like to request that the chairman issue a subpoena, 
if that is necessary, for all the records of employee stock 
sales or purchases, including any exercises of stock options of 
over 1,000 shares that occurred during 2001.
    Mr. Greenwood. The Chair will take the gentleman's requests 
under consideration.
    Mr. Waxman. Last fall, as Enron was unraveling, Enron 
reportedly made millions of dollars in payments to a number of 
Enron executives. In press accounts, Enron characterized these 
payments as retention payments. We have heard, however, that 
payments amounting to hundreds of thousands of dollars were 
made to executives of non-core Enron businesses or to Enron 
businesses that are now essentially defunct. We also heard that 
some of those who have received such payments did not remain at 
Enron. Mr. McMahon, who at Enron would have records of the 
names, positions and current employment status of all the Enron 
employees who received significant retention payments between 
October through December of 2001?
    Mr. McMahon. Again, that would be in our Human Resource 
Department.
    Mr. Waxman. And, Mr. Chairman, I would like to make a 
request for you to consider subpoenaing those records as well.
    Mr. Olson, you answered the question about SPEs of Mr. 
Largent. These are the special purpose entities. And you said 
it is not just Enron but other corporations that are using 
these in ways that may be for the same purpose but maybe not. 
But it was the way that Enron was able to move debt off its 
balance sheets and inflate the company's revenues. And you 
indicated you thought Congress ought to deal with this issue.
    I do want to point out that in the late 1980's, the 
Securities and Exchange Commission raised concerns about SPEs 
and they asked the Financial Accounting Standards Board to 
establish rules for SPEs. And FASB, a private organization in 
charge of establishing standards for financial accounting and 
reporting, is funded and overseen by accounting firms and their 
clients. The result has been a weak set of rules that continue 
to mask from investors many off-balance sheet transactions. 
Congress should have done more, shouldn't it----
    Mr. Olson. Absolutely.
    Mr. Waxman. [continuing] rather than just let FASB do this?
    Mr. Olson. Either at the SEC level or FASB level, so 
someone is asleep at the switch.
    Mr. Greenwood. Time of the gentleman has----
    Mr. Olson. To put the equity owners of a company at such 
risk with recourse to the company and to threaten its credit 
ratings and the like, with this kind of capital structure and 
marginal assets, is unconscionable.
    Mr. Waxman. I think there are a lot of areas where Congress 
was asleep at the switch and that this whole debacle is an 
indictment of our political system as well.
    Mr. Greenwood. Chair thanks the gentleman. The Chair also 
recognizes the gentleman from Texas, Mr. Green, who while not a 
member of the Oversight Committee is a member of the full 
committee and has been very assiduously participating in these 
hearings and is recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. Again, thank you for 
your courtesy to those of us who are members of the full 
committee, and, again, I want to reiterate the interest that I 
have being a Member of Congress from Houston in this situation.
    Mr. McMahon, did you just tell Mr. Waxman that you didn't 
have stock options with Enron?
    Mr. McMahon. No. I believe Mr. Waxman was talking about 
Deferred Compensation Program and withdrawals.
    Mr. Green. Okay. But you had stock options.
    Mr. McMahon. Yes.
    Mr. Green. And were those cashed in within the last year 
with Enron?
    Mr. McMahon. I believe the last stock options--you are 
talking about myself, personally.
    Mr. Green. You, sir, personally.
    Mr. McMahon. Last stock options I exercised was in March of 
2001.
    Mr. Green. Okay. In the Powers report, and I would like you 
to outline some of the transactions relating to the decision to 
have JEDI buyout Chewco. On page 60 and 61 of the Powers 
report, it outlines how Mr. Fastow and Mr. Kopper negotiated 
with you on the rate of investment return to the Chewco 
investors. The report states that you wanted to offer the 
Chewco investors a million dollar rate of return, but after 
discussions were held between Mr. Fastow and Mr. Kopper, that 
rate was increased to $10 million. What kind of justification 
did Mr. Fastow have for increasing the rate of return by nearly 
10-fold?
    Mr. McMahon. Mr. Fastow indicated to me that in a 
liquidation analysis of the partnership, if you were to 
liquidate all the assets within the partnership at the time, 
which actually my group agreed with, that the value of that 
interest to Chewco would be in excess of $20 million. So he 
felt, or he indicated to me that based on that the 
negotiations--the million dollars was unacceptable to the 
Chewco partners, so he negotiated a settlement of $10 million.
    Mr. Green. Where did you come up with a million dollars?
    Mr. McMahon. The way that we had looked at it was my group 
did look at that liquidation of the partnership and saw that in 
fact there could be a scenario where that equity could be worth 
in excess of $20 million. However, the partnership had 10 or 15 
years more to run on it. So our notion was as a commercial 
transaction that you should be able to approach the equity 
holder and say, ``Do you really want to wait 10 or 15 years and 
take the risk of the value or do you want to take a million 
dollars now and have a nice return?'' So we felt a million 
dollars was reasonable enough return on their equity, but it 
was substantially less than the value of share liquidation.
    Mr. Green. Did Mr. Fastow directly benefit from that 
particular transaction?
    Mr. McMahon. Not that I am aware of.
    Mr. Green. It does seem like, though, the partnership in a 
fiduciary relationship, you started with a million and you--if 
the $10 million that went to the partnership, obviously if it 
had been a million, that money would have stayed in Enron.
    Mr. McMahon. That is correct.
    Mr. Green. Okay. So the fiduciary relationship that maybe 
Mr. Fastow had with Enron he was more interested in the 
partnership.
    Mr. McMahon. It is hard to say, Congressman. I mean there 
was a commercial negotiation that underwent that I wasn't part 
of.
    Mr. Green. But he was negotiating for the partnership and 
not for Enron.
    Mr. McMahon. No, he actually was negotiating on behalf of 
Enron with Mr. Kopper, who was negotiating for the partnership.
    Mr. Green. I have a question concerning Enron's 401(k) plan 
that was offered to your employees, and, again, I know most of 
your responses have been Human Resources, but let me ask if you 
have the knowledge about it. In the copy of Enron Corporation's 
savings plan, I would like you to define the term found in 
article 15. Article 15 deals with the company's fiduciary 
responsibility to manage that land. It states that, ``The 
committee shall have final say over decisions impacting the 
savings plan.'' And then I flip back to article 1 of the 
savings plan to examine the definitions. And when I found the 
defined term of the committee, it is the Administrative 
Committee appointed by Enron Corp. to administer the plan. This 
definition doesn't seem to shed light on who was responsible 
for administrating the 401(k) plan, which, as we know, 
devastated the employees. Can you tell me do you have knowledge 
of who was on that committee and who supposedly managed the 
Enron savings plan?
    Mr. McMahon. Unfortunately, I do not have knowledge of who 
was on that committee. I was not on that committee, and as I 
testified earlier, my responsibilities are fairly new here. But 
I would be happy to get those facts and get them back to the 
chairman when we can get them.
    Mr. Greenwood. The time of the gentleman has expired.
    Mr. Green. Thank you, Mr. Chairman. We would love to have 
that information for the committee.
    One last question, if I----
    Mr. Greenwood. Time of the gentleman has expired. There 
will be a second round.
    Mr. Green. Okay. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair recognizes the gentleman from 
Massachusetts, Mr. Markey, who while also not a member of the 
subcommittee is a member of the full committee. We are happy to 
have his presence. You are recognized for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman, for your courtesy. Mr. 
McMahon, you have been Enron's CFO since last October and 
Enron's president and chief operating officer since last week. 
So I am going to ask you a set of questions now which will 
determine whether or not what we are hearing here today is the 
iceberg or just the tip of the iceberg.
    In addition to Raptor, Chewco and LJM entities, how many 
other special purpose entities has Enron created?
    Mr. McMahon. I don't know the answer to that.
    Mr. Markey. You don't know. Were any of these other SPEs 
set up with current or former Enron employees, officers, 
directors or their relatives, either as general partners, 
limited partners or as investors or beneficiaries?
    Mr. McMahon. I am not aware of any of those.
    Mr. Markey. You are not aware of any. Have you looked at 
that issue yet?
    Mr. McMahon. In my current capacity as president, I have 
not.
    Mr. Markey. How about in your capacity as chief financial 
officer since October, the navigator of the financial well-
being of the company? Did you look at that issue from October 
through last week?
    Mr. McMahon. No, I have not, because my focus, as the chief 
financial officer, late October was to try to keep the 
company's liquidity in place.
    Mr. Markey. Understand that.
    Mr. McMahon. We had a Special Committee of the Board was 
looking for investigative work, looking backwards.
    Mr. Markey. So you didn't think that was your job as the 
chief financial officer.
    Mr. McMahon. That is not quite what I said, Congressman. 
What I said was I was trying to keep the liquidity within the 
company, and I think that was a higher priority.
    Mr. Markey. No, but necessarily you have had 5 months to 
look at it and these other questions, which relate to the 
liquidity of the company in fact. How much has Enron invested 
in other SPEs, do you know?
    Mr. McMahon. I do not know.
    Mr. Markey. Do you know if any of these other SPEs have 
been used to remove debt from Enron's books, conceal investment 
losses or inflate Enron's earnings?
    Mr. McMahon. I believe several of the SPEs are related to 
debt transactions, but I don't know what they all have been 
or----
    Mr. Markey. How many?
    Mr. McMahon. I do not know.
    Mr. Markey. How much debt?
    Mr. McMahon. I don't know the answer to that.
    Mr. Markey. You don't know the answer to that. Has Enron 
provided any guaranties to any of these other SPEs against 
investment losses?
    Mr. McMahon. I am not aware of any, but I don't know.
    Mr. Markey. You don't know the answer to that. Do any of 
these other SPEs have any contract agreement or understanding 
with Enron that if it loses money, Enron will issue it Enron 
stock or options, warrants or other rights to obtain such 
stock?
    Mr. McMahon. There are two that I am aware of that have 
that feature.
    Mr. Markey. They are?
    Mr. McMahon. There is a transaction called Marlin, there is 
a transaction called Osprey, or Whitewing.
    Mr. Markey. Okay. And what happened in those? What is the 
arrangement there?
    Mr. McMahon. The arrangement there, as I understand it, is 
if there is a shortfall in the asset values within the 
vehicles, that the company is required to issue a sufficient 
amount of shares to satisfy the deficiency between the asset 
value and the debt obligations of the vehicle.
    Mr. Markey. Now, Sherron Watkins' August 14 memo to Ken Lay 
warned about, quote, ``NTM problems, mark-to-market problems in 
Enron Energy Services and Enron International Investments.'' 
What problems was she alluding to?
    Mr. McMahon. I do not know.
    Mr. Markey. You have been the chief financial officer since 
October. There is a memo there saying there is big financial 
problems there, and you haven't look at it yet?
    Mr. McMahon. The Special Committee was charged with that 
responsibility.
    Mr. Markey. Beginning in October?
    Mr. McMahon. Yes.
    Mr. Markey. So you have never looked at it. In fact, on 
page 1 of the Powers report, it says, ``Many questions 
currently part of the public discussion, such as questions 
relating to Enron's international businesses and commercial 
electricity ventures, broadband, et cetera, transactions within 
Enron securities by insiders, are beyond the scope we were 
given by the board.'' So they did not have authority to look at 
it. Did you look at it? The board was not given authority. As 
the chief financial officer, did you look at it in your 
fiduciary responsibility?
    Mr. McMahon. I have not looked at that at this point in 
time. Again, we are focused on liquidity, then of course the 
bankruptcy. These are matters that are related to ultimately 
looking back and determining what the audited--ultimately 
getting an audited set of financial statements.
    Mr. Markey. I understand, but you are the chief financial 
officer.
    Mr. McMahon. No, actually, I am the president of the 
company.
    Mr. Markey. You were. Have you conducted any investigations 
or inquiries to determine whether there is false or misleading 
mark-to-market accounting treatment of any of Enron Energy 
Services?
    Mr. McMahon. Not at this point.
    Mr. Markey. You have not. Have you, as chief financial 
officer or as chief operations officer, conducted any 
investigations or inquiries into any of the other SPEs to 
determine whether any of them raise accounting or disclosure 
issues which might be material to investors?
    Mr. McMahon. We are currently, as part of the bankruptcy 
process, trying to understand all these other SPEs, and so that 
work is ongoing as we speak.
    Mr. Markey. You are conducting an investigation of each of 
those matters?
    Mr. McMahon. We are looking through every special purpose 
entity that the company has at this point in time with respect 
to our bankruptcy and determining who our creditors are and how 
much they are owed.
    Mr. Greenwood. Time of the gentleman from Massachusetts has 
expired.
    Mr. Markey. Mr. Chairman, if I may just finish the 
sentence. If I may just finish the sentence. I would just say, 
Mr. McMahon, I think what your testimony is telling us is that 
all we know so far is the tip of the iceberg, that the iceberg 
is yet to be discovered, because thus far you, as the chief 
financial officer since all of us became public, did not look 
for the rest of the iceberg, and that is why the Congress and 
other investigators are going to have to do the work that, in 
my opinion, you and others inside of the firm should have done 
as soon as you were put on notice there were problems, 
especially with these SPEs, after the letters that--the 
documents that came from Ms. Watkins.
    Mr. Greenwood. Time of the gentleman has expired. The Chair 
would inform the subcommittee members, full committee members 
and the witness that we do intend to undertake a second round 
of questioning. It should not take as long as the first one. Do 
any of the witnesses need to take a 5-minute convenience break 
at this point? You are all good, strong men.
    Then in that case, the Chair recognizes the chairman of the 
full committee, Mr. Tauzin, for 5 minutes.
    Chairman Tauzin. Thank the chairman. Let me turn, Mr. 
McMahon, to some questions that continue to puzzle the dickens 
out of me, and, first of all, I want to lay the groundwork for 
something you--you did know Sherron Watkins, did you not?
    Mr. McMahon. That is correct.
    Chairman Tauzin. Did you know her before her work at Enron?
    Mr. McMahon. Yes. I have known Sherron for several years.
    Chairman Tauzin. Did you know about her August 14 or 15 
memo to Mr. Ken Lay describing what she considered to be 
problems that might amount to an implosion of the company and a 
wave of accounting scandals?
    Mr. McMahon. She sent me a copy of that one-page letter 
after she had delivered it to Mr. Lay. And then she came and we 
spoke about it.
    Chairman Tauzin. Did you speak to Mr. Lay about Sherron 
Watkins and her letter?
    Mr. McMahon. I did. When Sherron came by to see me, I 
encouraged her to actually take authorship of that letter and 
see Mr. Lay directly.
    Chairman Tauzin. That is to not do it anonymously but to 
let him know it was she who was writing it. Did you recommend 
her to Mr. Lay?
    Mr. McMahon. I did. I called Mr. Lay and explained to him 
that although I was unaware of any of the facts in her letter, 
whether they had merit or not, I did validate that Ms. Watkins 
was in fact a reputable source and employee and she should be 
listened to with----
    Chairman Tauzin. So you did vouch for her to Mr. Lay?
    Mr. McMahon. That is a fair assessment.
    Chairman Tauzin. In the letter, she says that, ``Skilling 
is resigning for personal reasons, but I think he wasn't having 
fun, looked down the road and knew this stuff was unfixable and 
would rather abandon ship now than resign in shame in 2 
years.'' Do you concur with that analysis?
    Mr. McMahon. First off, I am not sure that was in her one-
page letter.
    Chairman Tauzin. It is in the memo.
    Mr. McMahon. Which I did not see. She shared me with her 
one-page letter, and I don't know----
    Chairman Tauzin. Here is what is confusing to me, and I 
want you to tell me what you know about who knew this stuff. We 
learned from the Powers report and our own investigation that 
there were numerous, a rather healthy number of, employees of 
Enron who were investing in these deals. Ms. Ann Yaeger while 
still employed with Enron was invested in South Hampton to the 
tune of a $2,900 investment that turned into $500,000 in 6 
weeks. Mr. Glisan, Ms. Mordaunt invested each $5,800; they got 
a million dollars in 6 weeks. They were employees of Enron. Mr. 
Kopper is an employee of Enron. Mr. Fastow, not just an 
employee, he is the guy in charge of making recommendations of 
who is going to move up the ladder. He does a peer review, 
doesn't he? Pretty responsible.
    Mr. McMahon. That is correct.
    Chairman Tauzin. In fact, you complained to Mr. Skilling 
you were worried about your bonuses.
    Mr. McMahon. That is correct.
    Chairman Tauzin. Because of your problems with questioning 
Mr. Fastow's dealing, is that correct?
    Mr. McMahon. Yes. The conflict of interest that was 
presented by Mr. Fastow sitting on top of the entire financial 
organization and having interest in the general partner was 
problematic on many fronts.
    Chairman Tauzin. What is confusing to me, amazing I think 
to all of us as we examine this is who knew that all these 
employees--did Mr. Skilling know that Mr. Fastow was in a 
position where he could, in fact was, threatening to punish 
people because they were negotiating too well for Enron against 
him and his partnerships, when he himself was an officer of 
fiduciary capacity with Enron? Did Mr. Skilling know that?
    Mr. McMahon. Certainly, Mr. Skilling knew the structure of 
the organization as well as----
    Chairman Tauzin. Did Mr. Lay know that?
    Mr. McMahon. I don't know what Mr. Lay's knowledge was.
    Chairman Tauzin. Did Mr. Lay know about all these employees 
investing in these partnerships and making these outrageous 
returns?
    Mr. McMahon. Again, I don't know what Mr. Lay knew, but I, 
for one, was certainly surprised about the additional 
employees.
    Chairman Tauzin. Mr. Mintz, maybe you can help me here. Did 
either one of you catch some heat for attempting to disclose to 
other people in the corporation the kind of monies these people 
were making while they were still members of the Enron family, 
working for the company?
    Mr. Mintz. I caught some heat from Mr. Kopper when I sent 
that March memo to Mr. Buy and Mr. Causey.
    Chairman Tauzin. In fact, didn't Mr. Kopper contact one of 
you about the Enron/Wind deal?
    Mr. Mintz. Yes.
    Chairman Tauzin. Was it you, Mr. Mintz?
    Mr. Mintz. Yes, Mr. Chairman.
    Chairman Tauzin. And Mr. Kopper, what was he trying to get 
from you? Apparently, Enron/Wind--you were negotiating with 
someone else, right?
    Mr. Mintz. That is correct.
    Chairman Tauzin. What was he trying to learn from you?
    Mr. Mintz. That the company was negotiating with a third 
party, and a colleague of mine was representing the company, 
and Mr. Kopper came to me and asked me if I could find out some 
information as to the status of the negotiation with the third 
party.
    Chairman Tauzin. On behalf of whom?
    Mr. Mintz. On behalf of LJM.
    Chairman Tauzin. On behalf of the partnership?
    Mr. Mintz. That is correct.
    Chairman Tauzin. So he was trying to get you to give him 
inside information about the third party transaction so he 
could be better positioned to negotiate his deal for himself? 
Is that the deal?
    Mr. Mintz. One could draw that conclusion.
    Chairman Tauzin. What did you tell him?
    Mr. Mintz. I told him a couple of things. I told him, one, 
I was an employee of Enron and Enron was my client. And, two, 
that the transaction was being represented by one of the finest 
lawyers in the company, Lance Shuler, and that if he wanted to 
talk with anybody, he should talk with Lance.
    Chairman Tauzin. And at one point, you went to Jim Derrick, 
didn't you, the general counsel for Enron, to talk about the 
dysfunctionality of this arrangement, where you had Enron 
employees negotiating on both sides of the table. In fact, with 
Ms. Yaeger--it was really strange here--she is negotiating on 
one side of the table, and her fiance is on the other side of 
the table, is that right?
    Mr. Mintz. That is correct.
    Chairman Tauzin. And the eventually signed one document as 
husband and wife later on, on either side of the table, right?
    Mr. Mintz. That is my understanding.
    Chairman Tauzin. You complained about that dysfunctionality 
to Jim Derrick, the general counsel from Enron. Did you get any 
help?
    Mr. Mintz. Again, Mr. Chairman, as I said before, I saw 
this dysfunctionality on a regular basis, and I wanted to bring 
it to Mr. Derrick's attention, because he didn't see it on day-
to-day basis.
    Chairman Tauzin. Where is the disconnect? Why were you 
having such a great deal of trouble getting this information to 
the right people who might be able to do something about it? 
Were there people blocking you in the middle? Is Mr. Lay 
correct that he was being deceived by someone, that he didn't 
know this was going on? I mean that is basically what he told 
the Powers' investigators in his interviews, that he was 
deceived by his own managers, his own people in the 
corporation, didn't know what was going on, didn't understand 
all this dysfunctionality and these conflicts of interest. Is 
that correct?
    Mr. Mintz. Mr. Lay's statement?
    Chairman Tauzin. Yes.
    Mr. Mintz. I don't know.
    Chairman Tauzin. Mr. McMahon, you talked to Mr. Lay 
personally, did you not, and you vouched for Ms. Watkins, and 
you told him to pay attention to her concerns, did you not?
    Mr. McMahon. I did. As far as Ms. Watkins' allegations, I 
did speak to Mr. Lay personally about that, although that was 
the first time I had heard of any of those allegations.
    Chairman Tauzin. Did Andy Fastow know about the letter that 
Sherron Watkins sent to Mr. Lay?
    Mr. McMahon. I don't know when he found out about it, but 
at some point he did find out about it.
    Chairman Tauzin. Did he talk to you about it?
    Mr. McMahon. At a very high decibel level he spoke to me 
about it.
    Chairman Tauzin. High decibel level. What was his problem 
with it?
    Mr. McMahon. He accused me of being the ghost writer of 
that letter. And when I found that out, I had a fairly, again, 
loud exchange with him about it.
    Chairman Tauzin. In fact, when you went to complain to Mr. 
Skilling about the whole deal, did you get a call from Mr. 
Fastow right after that?
    Mr. McMahon. I did. About 2 weeks later, Mr. Fastow called 
me into his office and, as I testified earlier, he indicated 
that he was unsure at this point in time whether we could 
continue to work together, because he said, ``You should assume 
everything you say to Mr. Skilling gets to me.''
    Chairman Tauzin. In other words, it doesn't help you to 
complain to Mr. Skilling, because he comes right to me with the 
complaint.
    Mr. McMahon. His comment was, ``Everything Mr. Skilling 
says I hear about.''
    Chairman Tauzin. So the message was, ``Go get another job, 
because you can't work with us. You are messing in our deals, 
and everything you tell him is going to come to me anyhow, so 
it is not going to do you any good to go report on me,'' right?
    Mr. McMahon. Well, again, I don't know what his intent of 
the message was, but he clearly was telling me he was very 
aware of the conversation I had.
    Chairman Tauzin. So you got bumped, you are not treasurer 
anymore. Who took your place?
    Mr. McMahon. Mr. Glisan took my place.
    Chairman Tauzin. Mr. Glisan? Who did he report to?
    Mr. McMahon. At the time, I believe he reported to Mr. 
Kopper.
    Chairman Tauzin. And Mr. Kopper is working for Chewco.
    Mr. McMahon. As I have come to determine now, apparently 
Mr. Kopper has an investment in Chewco.
    Chairman Tauzin. So is it fair to say that you are 
complaining, giving them trouble, they move you over to another 
spot and put somebody in who is working with them?
    Mr. McMahon. Certainly, Mr. Glisan was working with Mr. 
Kopper when he took that role.
    Chairman Tauzin. Is he the same person that did not give 
the side agreement to Arthur Andersen? Mr. Bauer?
    Mr. Bauer. The side agreement was withheld. Mr. Glisan gave 
us the document that the side agreement would have been 
appended to.
    Chairman Tauzin. So Mr. Glisan gave you the document 
without the side agreement. He is the guy, he gets the job as 
soon as Mr. McMahon is moved out of the way, right? That is the 
picture we get? I think we are beginning to understand this. 
Thank you very much, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman. The Chair 
recognizes the gentleman from Michigan, Mr. Stupak, for 5 
minutes.
    Mr. Stupak. Thank you, Mr. Chairman. Mr. McMahon, as COO, 
chief operating officer, what are your duties and 
responsibilities?
    Mr. McMahon. A week into it, my duties right now are 
predominantly focused on attempting the company to reorganize--
--
    Mr. Stupak. Okay. If we didn't have this mess, as COO, what 
would you be doing? What are your responsibilities as a COO of 
Enron? And not right now, I mean----
    Mr. McMahon. But right now is pretty important. We happen 
to be in bankruptcy.
    Mr. Stupak. There must be a written----
    Mr. McMahon. And so the majority of my responsibilities 
right now are working with the Creditors Committee and 
reorganize the company to emerge----
    Mr. Stupak. Let me ask it this way: Is there a written 
description of a COO for Enron?
    Mr. McMahon. Not that I am aware of.
    Mr. Stupak. In Sherron Watkins' memo, she states, ``Cliff 
Baxter complained mightily to Skilling and all those who would 
listen about the inappropriateness of our transactions with 
LJM.'' Did any of you, Mr. Bauer, Mr. McMahon, Mr. Mintz, talk 
to Cliff Baxter about his complaints, and is there any 
documentation of those conversations, any written documentation 
or oral preservation through recording or anything like that? 
Start with you, Mr. Bauer.
    Mr. Bauer. I was unaware of Mr. Baxter's concerns about 
LJM.
    Mr. Stupak. Mr. McMahon?
    Mr. McMahon. As I testified earlier, I had a conversation 
with Mr. Baxter about my concerns, and he acknowledged the 
conflicts, but I was not aware of the conversations he had with 
Mr. Skilling.
    Mr. Stupak. So he acknowledged the conflicts, but what else 
did he say, Mr. Baxter?
    Mr. McMahon. Our discussion was mostly focused on--and this 
was right before I met with Mr. Skilling--the concerns I had as 
they manifested themselves in the Finance Department. He 
acknowledged that there were conflicts. When I expressed my 
concerns he understood them, and he was the one actually who 
encouraged me directly to go see Jeff directly to try and get 
it resolved, Mr. Skilling.
    Mr. Stupak. Mr. Mintz?
    Mr. Mintz. I had lunch with Mr. Baxter about a month before 
he had left the company, and we talked about LJM, and I shared 
with him my concern about the dysfunctionality. And Mr. Baxter 
was concerned about it and made the comment to me that he 
didn't understand why the board was allowing Andy to do this.
    Mr. Stupak. Did Mr. Baxter----
    Mr. Mintz. It was never memorialized.
    Mr. Stupak. Pardon?
    Mr. Mintz. It was never memorialized.
    Mr. Stupak. Memorialized? Did any memos from Mr. Baxter or 
anything like this to either one of you gentlemen about the 
meetings or anything at all about his concerns in writing?
    Mr. McMahon. Not that I am aware.
    Mr. Stupak. Okay. Mr. McMahon, you told us all about the 
people that you contacted about your concerns about Mr. 
Fastow's conflict of interest. You took personal abuse from Mr. 
Fastow, and no one, not Mr. Skilling, Mr. Causey, Mr. Buy, Mr. 
Lay, Mr. Sutton, not one lifted a finger to do anything to get 
you out of the way. You even told Mr. Sutton that Mr. Fastow 
would be making as much as $15 million, did you not?
    Mr. McMahon. I think it was $10 million to $20 million per 
year, that is correct.
    Mr. Stupak. Okay. And as Chairman Tauzin pointed out, it 
basically got so bad that you gave Mr. Skilling an ultimatum: 
Either he had to fix it or you would get a new job, is that 
right?
    Mr. McMahon. That is correct. I asked him either to remedy 
the situation or move me within the company.
    Mr. Stupak. And that is when shortly thereafter Mr. Fastow 
called you in and said you couldn't work together any longer?
    Mr. McMahon. That is correct.
    Mr. Stupak. Okay. And then about that--shortly thereafter 
then Mr. Skilling offered you a new job, is that correct?
    Mr. McMahon. That is correct, yes.
    Mr. Stupak. And that new job was what?
    Mr. McMahon. It was chief operating officer of a new e-
commerce group that we had set up, called Enron Networks.
    Mr. Stupak. Mr. Mintz, if I can go back with your lunch 
with Mr. Baxter, was it an attorney-client type lunch or was it 
a free flow of discussion? Did you feel some of this was 
privileged, the conversation?
    Mr. Mintz. I looked at it as two friends getting together 
for lunch.
    Mr. Stupak. And can you explain anymore what was discussed 
in any detail? Can you give any more details of what was 
discussed over this lunch? It was about a month before he left, 
you said.
    Mr. Mintz. That is correct. We touched upon that topic. 
Clearly, we had the conversation, but we talked about a number 
of different things, and the majority of the lunch didn't dwell 
on the LJM issue.
    Mr. Stupak. Okay. Was it mostly LJM, Chewco, JEDI or mostly 
LJM?
    Mr. Mintz. It was more focused on Andy running a private 
equity fund that was transacting with Enron.
    Mr. Stupak. Then I take it he was very concerned about this 
private transaction that was taking place with Enron?
    Mr. Mintz. He expressed just bewilderment about why the 
board was allowing this to happen, why they were allowing Andy 
to do it.
    Mr. Stupak. Thank you.
    Mr. Greenwood. Time of the gentleman has expired. The Chair 
recognizes himself for 5 minutes. Mr. McMahon, if appears that 
Lea Fastow, Andy's Fastow's wife, performed certain management 
tasks for Chewco. We are going to hand you a document, staff is 
bringing the document, that is not in the binder. If you take a 
look at--and I would ask unanimous consent that the two 
documents be placed in the record.
    If you take a look at the two documents we are about to 
distribute to you, you will see a facsimile letter dated 
October 13, 1998, from Lea Fastow to Michael Kopper regarding 
bank account balances for the various partnerships and 
corporations that made up the Chewco Partnership and an e-mail 
dated April 10, 1998 from Bill Dodson, Kopper's domestic 
partner and business partner in the Chewco partnerships, where 
he provides certain bank account information, and he writes, 
quote, ``Send lots of,'' and then that is followed by seven 
dollar signs. Do you know what compensation Mr. Fastow 
received--Mrs. Fastow received for her services to Chewco?
    Mr. McMahon. I do not know that.
    Mr. Greenwood. Mr. Mintz, do you know that?
    Mr. Mintz. No, Mr. Chairman.
    Mr. Greenwood. Okay. Enron made an $2.6 million tax 
indemnity payment to Chewco in September 2001. The Powers 
report states that there is credible evidence that Fastow 
approved this payment to Chewco, even though Enron's in-house 
counsel advised him, unequivocally, that there was no basis in 
the original 1997 purchase agreement for the payment and that 
Enron had no legal obligation to make that payment. That is 
from page 65 in the binder. Do you know which in-house counsel 
advised Fastow that Enron did not have to make the payment?
    Mr. McMahon. I am not aware of which counsel Mr. Powers was 
referring to here.
    Mr. Greenwood. Do you know why Fastow would ignore his 
attorney's advice and authorize an unnecessary $2.6 million 
payment?
    Mr. McMahon. No, I do not.
    Mr. Greenwood. I would assume you can't conclude then 
whether this was in Enron's interest for this payment. You 
don't know anything about this.
    Mr. McMahon. I really don't know anything about it, 
Congressman.
    Mr. Greenwood. Look on page----
    Mr. Mintz. Mr. Chairman, I am sorry to interrupt you, but I 
have got some insight into that, because I was that in-house 
counsel.
    Mr. Greenwood. Be delighted to hear from you, sir, Mr. 
Mintz.
    Mr. Mintz. I had worked on the original tax indemnification 
back in 1997, which was not unusual when you had a partner and 
there was a disconnect between income and cash distributions. 
What that indemnification agreement provided for was that if 
there was income without the attendant cash, there would be a 
cash distribution made to the partner. However, when that 
particular partner was able to claim tax benefits, that cash 
would be paid back. So in the tax parlance, it just took care 
of a timing issue, not a permanent issue.
    Mr. Greenwood. So does this appear proper to you, 
appropriate to you?
    Mr. Mintz. When the Chewco was being bought out, the 
transaction closed, and shortly thereafter Michael Kopper came 
to me--I am sorry, his accountant called me and said that 
Chewco was looking for an indemnification payment. And I said, 
``Well, if there is any money being paid, it should go back to 
Enron, because there were some small payments before that 
time.'' And in fact I lost my temper with his accountant, 
because I said, ``You know how the indemnification agreement 
read, educate your client and leave me alone.''
    It didn't go away, and Michael was insistent that the 
indemnification agreement was written incorrectly. I consulted 
with counsel from Vinson & Elkins, who I worked with on the 
indemnification. They confirmed my reading and understanding of 
it, and I reported back to Michael's accountant about that. 
Shortly thereafter, I got a call from Mr. Fastow. He said, ``I 
understand there is a problem on the tax indemnification 
agreement.'' I said, ``Andy, there is no problem, it reads 
correctly, and this was supposed to take care of a timing 
issue.'' So Andy said, ``Well, I really don't have any insight 
into the Chewco deal, Mr. Skilling does, Jeff does, and I will 
go talk to Jeff about it.''
    A couple days later, Andy called me back and said, ``I 
spoke to Jeff, and Jeff said the economics of the transaction 
with Chewco were to provide an after-tax return, and therefore 
the tax gross payment, if you will, was supposed to be made.'' 
I said, ``Andy, my understanding from the accountants on this 
is that it would have a cost to the company of a million to $2 
million,'' and he said, ``That's what the arrangement was.''
    Mr. Greenwood. Would you consider this to be more 
dysfunctionality? If you saw a man come into a bank with a hood 
over his head and a gun and take out a bag of money, would you 
call that dysfunctionality?
    Mr. Mintz. I was very frustrated and disappointed.
    Mr. Greenwood. Quickly, Mr. McMahon, as you may know, many 
officers and directors of Enron have now professed utter shock 
at Mr. Fastow's compensation from these partnerships. Despite 
his role as general managing partner, tell us about how these 
private equity funds normally work and what your own estimate 
was of Mr. Fastow's compensation without ever being told about 
the numbers specifically?
    Mr. McMahon. The compensation of general partners in 
private equity funds I think are fairly standardized across the 
industry, the private equity fund industry, and that is 
essentially whereby the general partner gets--the rule of thumb 
is a 2 percent annual fee on the total funds raised and then a 
20 percent promote or carried interest related to earnings of 
the fund above some certain benchmark.
    Mr. Greenwood. Do the math. What did that amount to for Mr. 
Fastow?
    Mr. McMahon. Based on my understanding of LJM2, which was 
about a $300 million fund, 2 percent of that is $6 million a 
year for the GP fee. And then if they had standard private 
equity returns, which are typically in excess of 30 percent, 
there could be another $15 million or so earned for the general 
partner.
    Mr. Greenwood. Is it reasonable to have expected that Mr. 
Skilling to have had a good idea of Fastow's compensation in 
LJM2, not of LJM2?
    Mr. McMahon. I don't know how familiar Mr. Skilling was 
with private equity compensation or not, but it is pretty 
standardized in the industry.
    Mr. Greenwood. My time has expired. The Chair recognizes 
the gentlelady from Colorado, Ms. DeGette, for 5 minutes.
    Ms. DeGette. Thank you, Mr. Chairman. Mr. Bauer, you said 
in your testimony that Enron withheld the information from you 
about the side agreement, which you were later horrified to 
find. Who was it that withheld that information from you?
    Mr. Bauer. Congresswoman, I don't know who withheld the----
    Ms. DeGette. But who was responsible for giving you the 
information?
    Mr. Bauer. Mr. Glisan was responsible for giving us the 
documentation related to that.
    Ms. DeGette. So far as you are concerned, it was Mr. Glisan 
who didn't give it to you.
    Mr. Bauer. It is fair to say that we did ask him for all 
the documentation.
    Ms. DeGette. How many of these SPEs did you deal with in 
your role?
    Mr. Bauer. None of the Raptor or LJM1 transactions or 
things like that, but I have seen----
    Ms. DeGette. Do you have an estimate? Ten, 20?
    Mr. Bauer. Yes. A dozen, 20, something like that.
    Ms. DeGette. A dozen? Okay, 20-something? And how did you 
go about collecting information for these various entities?
    Mr. Bauer. The typical process that I employed was to have 
a discussion with the transaction support person at Enron who 
would describe the transaction, we would provide accounting 
advice----
    Ms. DeGette. And they would give you the documentation?
    Mr. Bauer. [continuing] and they would give us the 
documentation on it.
    Ms. DeGette. And so you would assume you were getting the 
correct documentation.
    Mr. Bauer. That is correct. And we would typically ask for 
the executed copies at the completion of the transaction.
    Ms. DeGette. Okay. Mr. McMahon, I believe you told Chairman 
Tauzin that you had discussed the Sherron Watkins memo with Mr. 
Lay; is that correct?
    Mr. McMahon. It is not quite accurate. I discussed Ms. 
Watkins' credibility.
    Ms. DeGette. You discussed Sherron Watkins and her 
credibility with Mr. Lay.
    Mr. McMahon. That is correct.
    Ms. DeGette. And I assume that was after Mr. Lay had 
received her memo.
    Mr. McMahon. That is correct.
    Ms. DeGette. So when was that?
    Mr. McMahon. I am not quite certain of the dates, but it 
was a day or two after Ms. Watkins claimed authorship of the 
letter with Mr. Lay.
    Ms. DeGette. Did Mr. Lay tell you or had you seen Ms. 
Watkins' memo? Did you know what was in her memo?
    Mr. McMahon. I saw the one-page letter that she had written 
anonymously to Mr. Lay.
    Ms. DeGette. Okay. And so you were aware of the allegations 
in general that she was making.
    Mr. McMahon. Yes. What was in that letter I was aware of 
when I spoke to Mr. Lay.
    Ms. DeGette. Right. Okay. Now, did you take that 
opportunity, when you were meeting with Mr. Lay a day or two 
after the Watkins letter, to tell him about your conversation 
in March of 2000 with Mr. Skilling that we have been talking 
about here today, where you said it is not in the best interest 
of the shareholders to be doing these kind of deals?
    Mr. McMahon. At the time----
    Ms. DeGette. Sir, yes or no, did you?
    Mr. McMahon. Did I have a conversation with----
    Ms. DeGette. Yes. Did you talk to him about your concerns 
about these deals?
    Mr. McMahon. I did not talk to Mr. Lay with the concerns--
with the meeting I had with Mr. Skilling a year and a half 
earlier, no.
    Ms. DeGette. Okay. Did you talk to him about your concerns 
in general about these LJMs?
    Mr. McMahon. Now, I was not aware--I am not aware of any of 
the allegations Ms. Watkins made in her letter, so----
    Ms. DeGette. No, but you had concerns way back in March of 
2000. In fact, you said that you thought it was a potential 
breach of your fiduciary duty to have to work on both sides of 
these deals.
    Mr. McMahon. Well, the allegations that Ms. Watkins made in 
her----
    Ms. DeGette. No, I know, but I am talking about you, 
because you had concerns in March of 2000, and now here is 
Sherron Watkins coming forward with concerns over a year later, 
well over a year later. Did you take the opportunity then to 
say to Mr. Lay, ``You know, back a year and a half ago, before 
I got transferred, I also had some concerns about the company's 
financial structures.'' Did you talk to him about it?
    Mr. McMahon. No. Ms. Watkins' and my concerns were 
radically different. Mine were about structural management 
issues on conflicts; hers were about specific accounting 
matters.
    Ms. DeGette. Right. Well, okay. But I am just saying 
because you had the bully pulpit, here you are talking to Mr. 
Lay. Did you ever talk to Mr. Lay about your concerns about 
these financial matters?
    Mr. McMahon. No. The matters I spoke with Mr. Skilling 
about and Mr. Sutton about were with those two.
    Ms. DeGette. Okay. Now, did you ever prepare an analysis of 
Chewco's distributions purchase interest in JEDI on behalf of--
let us see, who would it have been on behalf of? To Mr. Fastow?
    Mr. McMahon. I am not so sure if I personally did that, but 
someone in my group prepared an analysis when we were 
considering the Chewco buyout.
    Ms. DeGette. Okay. If you will look at exhibit 28 in your 
notebook, that is a memo that says, ``Andy, here is my analysis 
of the distributions purchase of Chewco's interest in JEDI. I 
am showing you the numbers Jeff M. gave you.'' I assume that is 
you. Is that you?
    Mr. McMahon. It is not my memo, so----
    Ms. DeGette. Well, did you give him numbers?
    Mr. McMahon. I did give him an analysis of the Chewco 
buyout.
    Ms. DeGette. Okay. Did you ever find out what happened with 
your analysis after that time?
    Mr. McMahon. You mean did I ever find out what ultimately 
got executed?
    Ms. DeGette. Yes.
    Mr. McMahon. I found out when the Special Committee report 
came out last week.
    Ms. DeGette. So you didn't find out the result of this 
until last week?
    Mr. McMahon. No.
    Ms. DeGette. Okay.
    Mr. McMahon. I had moved out of the treasurer role 
apparently when----
    Ms. DeGette. Okay. I just have one last question for you, 
Mr. Mintz, and that is your supervisor, Mr. Derrick, had been a 
former partner at Vinson & Elkins, correct?
    Mr. Mintz. That is correct.
    Ms. DeGette. And you went to Mr. Derrick, and you told him 
about the concerns you were seeing, correct?
    Mr. Mintz. I was bringing--I advised him on what was going 
on on the 20th floor.
    Ms. DeGette. When was that?
    Mr. Mintz. I think our first formal meeting was in March of 
2001.
    Ms. DeGette. Okay. And you told our committee staff that 
when you told him about all of this, he was just sort of poker-
faced, didn't say anything, right?
    Mr. Mintz. That is correct.
    Ms. DeGette. And so it was after you expressed those 
concerns to him that you went out and hired outside counsel, 
going around your supervisor.
    Mr. McMahon. We had a subsequent meeting, and then after 
that time, you are correct, Congresswoman, I did hire Fried 
Frank.
    Ms. DeGette. So you had a couple meetings with him, you 
didn't get satisfaction. You went out of the line really and 
instead of hiring Vinson & Elkins, which was Enron's attorney, 
you went and got independent counsel, correct?
    Mr. Mintz. That is correct.
    Ms. DeGette. And just to finish, Vinson & Elkins was the 
law firm that prepared the response to the Sherron Watkins 
memo, whistleblower memo, correct?
    Mr. Mintz. Correct.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Stearns [presiding]. I thank the gentlelady. Mr. Mintz, 
where was your office? You were the general counsel. Where was 
your office in this building relative to Mr. Fastow?
    Mr. Mintz. Mr. Fastow was on the 50th floor where many of 
the executives were, and I was on the 20th floor where a number 
of the Global Finance employees were.
    Mr. Stearns. Okay. I just call your attention to document 
number 23 and document number 2 in the notebook. These are 
quite detailed documents, memorandum, inter-office memorandum. 
It appears you have had several conversations with Mr. Fastow 
about issues relating to disclosure of his interests, Mr. 
Fastow's interests and compensation from these LJM 
partnerships. And then you wrote these memos, which are quite 
detailed. It seems like you could also get up on the elevator 
and talk to him, and I wonder about these memos. In these 
conversations you had, is it fair to say that Mr. Fastow was 
interested in trying to minimize his disclosure to the greatest 
extent possible?
    Mr. Mintz. I think that is a fair description.
    Mr. Stearns. And, you know, I look at some of your memos 
here. You sort of point out to him some of the steps taken to 
minimize any related party and proxy disclosure in document 
number 2 and document 23. ``The decision not to disclose in 
this instance was a close call,'' you said. ``Arguably, the 
more conservative approach would have been to disclose the 
amount of your interest.'' So, obviously, these memos seem to 
be a memorandum for the record, plus you have had 
conversations. Did Mr. Fastow ever suggest a reason for wanting 
to keep the disclosure of his compensation, how much money he 
was making, and interest a secret, particularly from Mr. 
Skilling?
    Mr. Mintz. He did.
    Mr. Stearns. And what did he say to you?
    Mr. Mintz. He said that if Jeff ever knew how much he made 
from the Rhythms Net transaction, he would have no choice but 
to shut down LJM.
    Mr. Stearns. In fact, did Enron ever disclose Mr. Fastow's 
economic interest or compensation from these partnerships and 
the transactions prior to October 2001 when it fired him?
    Mr. Mintz. No monetary figure was provided prior to that 
time.
    Mr. Stearns. Okay. Mr. Fastow never did disclose, even to 
you, the amount of his compensation from the LJM deals, is that 
correct?
    Mr. Mintz. That is correct.
    Mr. Stearns. Did you ask Mr. Causey to raise the issue of 
Mr. Fastow's compensation with the board of directors at his 
February 12, 2001 meeting?
    Mr. Mintz. I did.
    Mr. Stearns. You did. Okay. Did Causey raise it too?
    Mr. Mintz. With the board at that meeting?
    Mr. Stearns. Did Mr. Causey raise it to the board?
    Mr. Mintz. No, sir.
    Mr. Stearns. Okay. Mr. McMahon, prior to firing Glisan, you 
had a conversation with Mr. Glisan where you ask him if he any 
interest in the LJM partnerships. What did he say to you?
    Mr. McMahon. This is prior to his termination. He said he 
had no interest. Actually, my question to him was a little 
broader, because I was not aware of all the partnerships, so I 
said, ``I want to make sure that this new management team 
doesn't have any baggage, and do you have any interest in any 
of these partnerships? I don't even know the names to ask you, 
but you know what I am asking, whether it is direct or 
indirect.''
    Mr. Stearns. So he knew what you were talking about.
    Mr. McMahon. There is no question he knew what I was 
talking about.
    Mr. Stearns. And so he didn't tell the truth to you.
    Mr. McMahon. Well, he responded no to that question.
    Mr. McMahon. Okay. Would you consider that he was not 
telling the truth?
    Mr. McMahon. He responded no to the question. Subsequently, 
I did learn that he was in fact an investor in one of these LJM 
partnerships.
    Mr. Stearns. So it would appear to me that is why you fired 
him.
    Mr. McMahon. Yes. The grounds of Mr. Glisan's termination I 
believe were related to a violation of the code of ethics, or 
code of conduct, sorry.
    Mr. Stearns. Mr. McMahon, I have a memo which is number 9, 
and it has been gone over a couple of times, which is some of 
the memo is talking about your negotiations with Mr. Fastow 
with Enron, and also talking about, I guess, some of your 
conversation with Mr. Skilling. As a result of this memo, did 
you feel uneasy about the Enron stock at all?
    Mr. McMahon. No, not at the time. My concerns, frankly, 
were related to internal management of a conflict. I did not 
see this being a large issue from a stock price perspective.
    Mr. Stearns. We have a schedule of March 2000, which is 
your calendar, which is tab number 10, I think, in which it 
shows that you met with numerous people--Mr. Skilling, with Mr. 
Fastow--all during this period, in which you also wrote this 
memo, which is document number 9 in which you are talking with 
these people. And looking at the calendar and also looking at 
your notes, my first impression is that you had some concern 
here about Enron, its stock and its partnerships, and there 
seems to be some apprehension. Would that be a fair assumption?
    Mr. McMahon. I don't think that is a fair assumption. My 
concern was how the situation was affecting the management of 
Finance Department internally.
    Mr. Stearns. What does that mean?
    Mr. McMahon. Meaning that it was disruptive the way that 
the organization was set up, with Mr. Fastow and his personal 
interests, et cetera, et cetera, and him being the chief 
financial officer of the company. I did not, at that point in 
time, have concerns on the stock.
    Mr. Stearns. Now, I noticed that you had a sale of a large 
block of your stock, up to $1.8 million, that was exercised on 
March 16, and I guess the sale was on March 16. This is based 
upon insider trading list. I have Mr. Baxter had a sale of 
almost a million dollars on March 22. Mr. Fastow had a sale on 
March 27 of almost $7.5 million. Then before that, on March 27, 
he exercised that option. So I mean there was a lot of insider 
trading as a result of all these activities. And I am just--I 
don't know, I am just asking, based upon the insider trading 
and some of the memos that you wrote to yourself as well as the 
calendar and the people you met with. Is it possible that some 
alarms, some flags went up and suddenly people start saying, 
``Wow, I better start moving on here and cash in my chips.'' I 
mean that is just an observation. And my time has expired, and 
would you like to respond? You are welcome to.
    Mr. McMahon. I would like to respond to that.
    Mr. Stearns. Sure.
    Mr. McMahon. I can't respond to everyone else's stock sale 
program, but personally I have a program of diversifying my 
investments. Generally speaking, when our unvested option vest, 
I generally sold them in the market. And given the other 
activities just described, it wouldn't surprise me at or around 
that point in time there was a vesting date that may have 
occurred.
    Mr. Stearns. Okay. Mr. John, for questions?
    Mr. John. Yes. Thanks, Mr. Chairman. I have a quick 
question, both to Mr. McMahon and Mr. Mintz. Give me a short 
description of Mr. Skilling's management style. I mean you guys 
worked with him every day.
    Mr. Mintz. Congressman John, I did not have a working 
relationship with Mr. Skilling, so I really--I can't answer----
    Mr. John. You never interacted with him or had meetings 
with him at any time?
    Mr. Mintz. No, sir.
    Mr. John. So you don't have an opinion formed because of 
your interactions with him about his management style?
    Mr. Mintz. Really, my only dealings with Jeff were in a 
social setting, company Christmas party.
    Mr. John. Mr. McMahon?
    Mr. McMahon. My description of Mr. Skilling's management 
style would be he was an intense, hands-on manager.
    Mr. John. Intense, hands-on. The New York Times this 
morning described him as the, quote, ``ultimate control 
freak,'' this morning. Would you agree with that?
    Mr. McMahon. I did not actually catch that article, but----
    Mr. John. It was there.
    Mr. McMahon. [continuing] I think I stand by my intense, 
hands-on description.
    Mr. John. In fact, it goes on to say, ``The sort of hand-on 
corporate leader who kept his fingers in all pieces of the 
puzzle.'' Do you agree generally with----
    Mr. McMahon. My description is Jeff was actively involved 
in the businesses that Enron was in.
    Mr. John. Okay. I have got one final question to ask, and 
this question is actually from Congresswoman Jackson Lee who is 
not a member of this committee, who cannot ask a question, but 
I have decided that it is a very good question, and I would 
like to ask you, because she hasn't been allowed to participate 
in the proceedings.
    Enron, itself, and many of the ex-Enron employees and 
retirees live in her district, in her congressional district. 
Do you guys have any plans, short of the bankruptcy 
proceedings, for interim finance relief to the ex-Enron 
employees and their families?
    Mr. McMahon. When you say short of the bankruptcy, you mean 
short of what was authorized via the bankruptcy.
    Mr. John. Correct.
    Mr. McMahon. We are actually working with the Creditors 
Committee on a variety of matters that include that as well. 
The company at this point in time, because of the bankruptcy, 
cannot single-handedly authorize that type of activity. But 
there are discussions ongoing with the Creditors Committee for 
some additional relief, and we are going to see where that goes 
with the Creditors Committee at this point.
    Mr. John. Okay. Will there be any voluntary help that you 
are aware of amongst the Enron family for some of these folks?
    Mr. McMahon. If you are speaking about non-financial 
assistance, something that the employees are going to deal 
with----
    Mr. John. Correct.
    Mr. McMahon. [continuing] I am not exactly aware of exactly 
what the various employee groups are planning at this point in 
time. But, again, the financial side of it, unfortunately, the 
management and the company is not in complete control at this 
point.
    Mr. John. Okay. Mr. Mintz, do you have anything to add to 
that?
    Mr. Mintz. No, sir.
    Mr. John. Okay. And, finally, my questioning and lines of 
questions always are always falling back on this SPE document 
that Mr. Skilling, who is the ultimate control freak, according 
to the New York Times, and a hands-on kind of guy, didn't sign. 
My question to Mr. Mintz is are you aware of any advice that he 
got--that he may have received from you or anyone else as to 
not--as it would be in his best interest not to sign this SPE 
document?
    Mr. Mintz. I am not aware of that advice, Congressman.
    Mr. John. Okay. That is all I have. I will yield----
    Chairman Tauzin. But would the gentleman yield a second?
    Mr. John. Sure, I will yield to the gentleman from Chack 
Bay, Louisiana.
    Chairman Tauzin. I thank my friend from Crowley. Let me, 
for the record, indicate that Congresswoman Sheila Jackson Lee 
has been a welcome guest of our committee proceedings from the 
beginning of this inquiry, and that we are delighted that she 
is with us today because of her sincere interest on behalf of 
her constituents living in that area. Committee rules do not 
allow the participation of non-members of the committee in 
these kind of proceedings, but we have not only welcomed her 
but encouraged her attendance because of her extraordinary 
interest, obviously, on behalf of her constituents. And I 
wanted to recognize her presence today and thank her again for 
that help she has given us.
    Mr. Stearns. Thank the gentleman. Gentleman from Oklahoma, 
Mr. Largent?
    Mr. Largent. I don't have any additional questions.
    Mr. Stearns. No additional questions? Gentleman from 
Massachusetts, Mr. Markey, is----
    Mr. Markey. Thank you, Mr. Chairman. Mr. McMahon, before 
you were transferred, you were a treasurer at Enron. You were 
involved in numerous frenzies to deal with cash-flow problems 
through SPEs. Could you describe what kinds of cash-flow 
problems Enron had when you were treasurer at the end of 1999 
and early 200 and how they were dealt with? We are talking 
about some rather major crisis with potential impacts of $100 
million or more.
    Mr. McMahon. I am not sure if I know exactly what you are 
referring to, but as part of the whole management of the 
liquidity, the company cash-flow was an important issue for the 
company.
    Mr. Markey. Well, let me move on. A week before the 
bankruptcy, when you were CFO, the company paid out retention 
bonuses to executives. As CFO, you would have known that the 
$100 million was about to be paid out. Did you also know about 
the imminent bankruptcy at that time, since you were CFO?
    Mr. McMahon. The retention payments were something that was 
recommended and approved by the board. And, in fact, yes, they 
were paid out prior to the bankruptcy. And the----
    Mr. Markey. Did you know about the imminent bankruptcy at 
the time that the bonuses were paid out?
    Mr. McMahon. We knew, certainly, that the bankruptcy was 
one of several options that could occur.
    Mr. Markey. Were you a beneficiary? Did you receive a 
bonus?
    Mr. McMahon. Yes, I did.
    Mr. Markey. Did you have knowledge that a bankruptcy was 
looming at that time?
    Mr. McMahon. I think bankruptcy had been looming for a time 
period at that point in time. It was one of the many options 
that we were exploring.
    Mr. Markey. As CFO, did you raise objections that bonuses 
were being paid with bankruptcy looming?
    Mr. McMahon. The notion behind the retention payments, 
Congressman, was one that if we were to go into bankruptcy, 
that these key individuals would remain within the company to 
protect the businesses' and assets' value for the creditor.
    Mr. Markey. You can see, though, where ordinary investors 
and ordinary employees would think that this was just the first 
class passengers in the company taking care of themselves as 
the other passengers would all be going----
    Mr. McMahon. Well, again, the notion is preserve the value 
for all stakeholders, predominantly the creditors at that point 
in time. So I think that it is not uncommon in bankruptcy for 
these type of things to happen, and I think frequently, in the 
long run, the asset values are protected by keeping certain 
individuals around long enough to----
    Mr. Markey. All right. Let me ask this, Mr. McMahon: 
Earlier, you said that you recalled that in the Marlin, Osprey 
and Whitewing transactions, Enron had agreed to provide these 
SPEs with Enron stock if there was a shortfall? Has the trigger 
been hit that results in Enron being required to issue stock to 
Marlin, Osprey or Whitewing?
    Mr. McMahon. Yes. I believe that both the stock price 
trigger and the credit rating trigger have----
    Mr. Markey. How much was issued, do you know?
    Mr. McMahon. I don't believe any additional stock has been 
issued because the bankruptcy stayed all those contracts, as I 
understand it.
    Mr. Markey. How much is the shortfall in those three?
    Mr. McMahon. I do not know the answer to that.
    Mr. Markey. Could you provide that for the record?
    Mr. McMahon. I will be happy to provide that to the 
committee as soon as we know the answer to that.
    Mr. Markey. Who are the investors and general partners in 
Marlin, Osprey and Whitewing?
    Mr. McMahon. Again, I don't know the investors here today, 
but I will be happy to provide that to the committee when we 
get that information.
    Mr. Markey. What was your relationship with Osprey?
    Mr. McMahon. Osprey was initially put together----
    Mr. Markey. Did you have any relationship with at all, 
Osprey?
    Mr. McMahon. Yes. I was treasurer at the time that the 
Osprey transaction was executed.
    Mr. Markey. What was your compensation in that deal, if 
any?
    Mr. McMahon. I had no compensation in that deal whatsoever.
    Mr. Markey. How about your relationship with Marlin or 
Whitewing?
    Mr. McMahon. Actually, Osprey and Whitewing are the same.
    Mr. Markey. Osprey and Whitewing?
    Mr. McMahon. Marlin was a separate transaction, which was 
also executed when I was treasurer of the company.
    Mr. Markey. Did you have any financial benefit that you 
were the beneficiary of?
    Mr. McMahon. No, I had no financial benefit or interest 
whatsoever in Marlin.
    Mr. Markey. Mr. Chairman, I thank you.
    Mr. Greenwood. The Chair thanks the gentleman. The 
gentleman from Texas, Mr. Green, I believe has not yet had a 
second round.
    Mr. Green. Thank you, Mr. Chairman, and, again, I want to--
like my colleagues, I want to thank you for both your effort 
but also in allowing some of us to sit in on the hearings.
    Mr. McMahon, do you believe that Mr. Fastow would act 
independently of Mr. Skilling? And I ask because I have a 
feeling that when we hear testimony in the next panel and of 
course whatever we find out from Mr. Fastow they might want to 
blame each other. But do you think they acted independently of 
each other or did they work together, in your relationship and 
your experiences?
    Mr. McMahon. Frequently, they--as one being president and 
one being chief financial officer, frequently they worked 
together.
    Mr. Green. Okay.
    Mr. McMahon. I am not sure if I understand your----
    Mr. Green. Well, I am just wondering if both in the 
congressional hearings, but since we are not going to hear from 
one but we will hear from the other, if it will be just saying, 
``Oh, that was all--'' if they were so close, and it looked 
like, at least from the paper trail we are seeing, of course it 
hasn't been filled out, but it looks like they worked fairly 
close together.
    Mr. McMahon. Again, I think that organizationally one was a 
direct report of the other, and I really can't speak to the 
closeness of their relationship, frankly.
    Mr. Green. Let me ask another question. Out of concern for 
the former employees who received their $4,500 in severance pay 
and lost their life savings, were withdrawals made from the 
deferred compensation plan during the period when Enron's 
401(k) was locked down by anyone that you could think of, like 
whether it be Kenneth Lay or Greg Whalley or yourself or any 
list of executives who received withdrawals during that period, 
during the lockdown?
    Mr. McMahon. I can only speak to myself, and I had no 
withdrawals during that time period, but, unfortunately, I 
don't have that information with me on the other parties, and I 
would be happy to provide it to the committee.
    Mr. Green. So you did personally have withdrawals or----
    Mr. McMahon. No, I did not.
    Mr. Green. You did not. Okay. Let me ask, were you allowed 
a line of credit as an officer of Enron?
    Mr. McMahon. I was not.
    Mr. Green. Okay. Are you familiar with how many officers 
had lines of credit? Like, for example, I know Kenneth Lay had 
a line of credit. Do you know if Mr. Skilling had one or Mr. 
Fastow?
    Mr. McMahon. The only line of credit I am familiar with of 
any officers was Mr. Lay, but I am not aware of one or the 
other, frankly.
    Mr. Green. And how do you know about Mr. Lay's line of 
credit, just from the publicity?
    Mr. McMahon. No. Shortly after I took over as chief 
financial officer, Mr. Lay had a drawdown on his line of 
credit, and I received a phone call from our Cash Management 
Group to validate that that was an appropriate drawdown.
    Mr. Green. Okay. So that while you were the chief financial 
officer, you didn't have any--there was no other drawdowns by 
any of the other executives, if there was a line of credit?
    Mr. McMahon. I think I can--all I can respond to that is I 
was not aware of any other drawdowns.
    Mr. Green. Okay. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from California, Mr. Waxman, for 5 
minutes.
    Mr. Waxman. Thank you, Mr. Chairman, and I want to join Mr. 
Green in thanking you for making time available to those of us 
who are not on this subcommittee.
    Mr. Olson, we talked in my last round about these 
partnerships, these special entities, and I want to discuss 
with you the problems with mark-to-market accounting. According 
to press accounts, Enron pushed the limits of mark-to-marketing 
accounting, which allows a company to recognize all revenues 
upfront on a long-term contract. In order to determine the 
profitability of a contract, Enron had great leeway to make 
assumptions about future energy prices, energy use and other 
factors.
    The New York Times reported that Enron Energy Services, or 
EES, deliberately used questionable revenue assumptions to 
inflate its profits, and the vice chairman of EES at the time 
that these questionable practices were occurring was Thomas E. 
White, who became the secretary of the Army in May 2001. A 
former EES employee called this accounting practice a license 
to print money. Mr. Olson, did Enron abuse market-to-market 
accounting, in your view?
    Mr. Olson. I am not an accountant, Congressman. From what I 
read in the press as well, there was certainly--they were 
stretching the limits, and I think what you are alluding to is 
what is called a variation on that mark-to-model accounting, 
where you go out and make these assumptions which may or may 
not work out. Everything else, if you again connect the dots, 
would suggest to me that they were using mark-to-market 
accounting very, very aggressively.
    Mr. Waxman. Do you know whether Enron was an aberration or 
other energy companies are currently using the same accounting 
practices, as they are pushing for electricity deregulation?
    Mr. Olson. Mark-to-market accounting is used by lots of 
people--banks, securities firms and the like--except they are 
only marking to 12 months out, 18 months out and the like. 
There are people who do have power plant towing agreements out 
there, which go out to seven or 8 years where they do make a 
significant impact on their current earnings. But in terms of--
I don't think it would tie at all to electricity deregulation. 
There are many companies out there using mark-to-market 
accounting or accrual accounting even, and they are still--they 
are more profitable under accrual accounting.
    Mr. Waxman. Should we be concerned that if these accounting 
practices are being used at other energy companies, that they 
can be hiding fundamental problems as they did with Enron?
    Mr. Olson. You should be very concerned, yes.
    Mr. Waxman. Well, I think this is a very important issue, 
and I hope the committee will seriously examine it.
    Mr. McMahon, I want to ask you about the mark-to-marketing 
accounting at Enron and whether it might have been limited to 
EES. You were formally the president and CEO of the Enron 
Industrial Market. Did that division also use mark-to-marketing 
accounting?
    Mr. McMahon. Yes, it did.
    Mr. Waxman. And did other divisions or subsidiaries of 
Enron also use this form of accounting?
    Mr. McMahon. To my knowledge, they did, yes.
    Mr. Waxman. This committee has heard testimony from 
economists and Wall Street analysts who claim that Enron abused 
the use of mark-to-marketing accounting to inflate profits. In 
your view, did Enron abuse the mark-to-marketing accounting to 
inflate the appearance of profitability?
    Mr. McMahon. I am not sure I can respond to that as a 
global statement, because I was not responsible for the 
accounting for Enron, but my understanding of the mark-to-
market accounting was that was a requirement for the type of 
business activity that Enron's--predominantly the wholesale 
business was undertaking. My understanding was that was a 
requirement to follow that type of accounting.
    Mr. Waxman. It was a requirement to follow that kind of 
accounting. Was it also helpful, to inflate profits, to use 
that kind of accounting?
    Mr. McMahon. Again, I don't know whether it was applied 
across the board appropriately or not, but my understanding is 
it was a requirement for the company to follow that type of 
accounting for those activities.
    Mr. Waxman. You are the president and CEO of Enron, you are 
the former chief financial officer of Enron. Based on what has 
happened at Enron, we now know what has happened at Enron, do 
you believe that mark-to-marketing accounting is inappropriate 
for energy contracts because of the difficulty in assessing 
what the upfront value is?
    Mr. McMahon. I am not sure I am actually the qualified 
person to respond to whether that is the appropriate accounting 
for the activity, frankly, Congressman.
    Mr. Waxman. Anybody else in the panel have any views on 
this issue? Mr. Olson?
    Mr. Olson. I think the system has been gamed so much so 
that Wall Street, whether you use mark-to-marketing accounting 
or not, will not believe the earnings. You see this in this 
collateral damage from the whole Enron shakeout. If you show me 
a dollar a share of incremental earnings, I will tell you that 
the market won't pay for it. You see it in certain companies 
right now, in Oklahoma, for instance.
    Mr. Greenwood. The time of the gentleman has expired. 
Members of the panel, we thank you for your testimony. It has 
been a long day for you, and you are excused.
    The Chair now would now call forward Mr. Jeffrey K. 
Skilling, former President and CEO, Enron Corporation; Dr. 
Robert Jaedicke, Enron Board of Directors, who is Chairman of 
the Audit and Compliance Committee of Enron Corporation; and 
Mr. Herbert S. Winokur, Jr., Board of Directors, Chairman of 
the Finance Committee of Enron Corporation.
    Please be seated, Mr. Skilling, Mr. Jaedicke, and Mr. 
Winokur. Thank the witnesses for your attendance today.
    Gentlemen, you are aware that this committee is holding an 
investigative hearing, and that it is the practice of this 
committee when holding an investigative hearing to take 
testimony from our witnesses under oath. Do any of you object 
to testifying under oath?
    Seeing no such objection, I would advise you that under the 
rules of the committee and the rules of the House you are 
entitled to be represented by counsel. Do any of you gentlemen 
prefer to be--choose to be represented by counsel today? Mr. 
Skilling?
    Mr. Skilling. My counsel is here, Mr. Bruce Hiler and Mr. 
Liebler.
    Mr. Greenwood. Your attorney may advise you during your 
testimony?
    Mr. Skilling. I assume so.
    Mr. Greenwood. Mr. Jaedicke, do you have an attorney 
advising you?
    Mr. Jaedicke. Mr. Chairman, my counsel will be Robin Gibbs 
and Neil Egglestrom, and they are both here.
    Mr. Greenwood. They are with you as well?
    Mr. Winokur, do you choose to be advised by counsel today?
    Mr. Winokur. Mr. Chairman, the same counsel.
    Mr. Greenwood. Okay. Thank you.
    In that case, if you gentlemen would rise and raise your 
right hands, I will swear you in.
    [Witnesses sworn.]
    Mr. Greenwood. Mr. Skilling, do you have an opening 
statement, sir?
    Mr. Skilling. Yes, I do.
    Mr. Greenwood. The Chair would recognize you for 5 minutes 
to offer your opening statement.

  TESTIMONY OF JEFFREY K. SKILLING, FORMER PRESIDENT AND CEO, 
     ENRON CORPORATION; ROBERT K. JAEDICKE, ENRON BOARD OF 
 DIRECTORS, CHAIRMAN OF AUDIT AND COMPLIANCE COMMITTEE, ENRON 
 CORPORATION; AND HERBERT S. WINOKUR, JR., BOARD OF DIRECTORS, 
      CHAIRMAN OF THE FINANCE COMMITTEE, ENRON CORPORATION

    Mr. Skilling. Thank you, Chairman Greenwood and members of 
the committee. My name is Jeff Skilling. I worked for Enron for 
over 10 years, leaving in August of 2001 after being CEO of the 
company for 6 months.
    During my time at Enron, I was immensely proud of what we 
accomplished. We believed that we were changing an industry, 
creating jobs, helping to resuscitate an ailing energy 
industry, and, by bringing choice to a monopoly dominated 
industry, we were trying to save consumers and small businesses 
billions of dollars each year. We believed fiercely in what we 
were doing.
    But today, after thousands of people have lost jobs, 
thousands of people have lost money, and, most tragically, my 
best friend has taken his own life, it all looks very 
different. As proud as I was of what we tried to accomplish at 
Enron, as I sit here today I am devastated by and apologetic 
about what Enron has come to represent.
    I know that no words can make things right. Too many people 
have been hurt too much. I am here today because I think 
Enron's employees, shareholders, and the public at large have 
the right to know what happened. I have done all I can to help 
this investigation. I have testified for 2 days at the 
Securities and Exchange Commission. I have spoken on three 
occasions to the Special Committee of the Board and have spoken 
to the committee of this staff as well.
    I have not exercised my rights to refuse to answer a single 
question, not one, and I don't intent to start now. So let me 
talk about Enron and its demise.
    First, contrary to the refrain in the press, while I was at 
Enron I was not aware of any financing arrangements designed to 
conceal liabilities or inflate profitability. The off balance 
sheet entities or SPEs that have gotten so much attention are 
commonplace in corporate America, and if properly established 
they can effectively shift risk from the company shareholders 
to others who have a different risk/reward preference. As a 
result, the financial statements issued by Enron, as far as I 
knew, accurately reflected the financial condition of the 
company.
    Second, it is my belief that Enron's failure was due to a 
classic run on the bank--a liquidity crisis spurred by a lack 
of confidence in the company. At the time of Enron's collapse, 
the company was solvent, and the company was highly profitable, 
but apparently not liquid enough. That is my view of the 
principal cause of the failure.
    Now let me address some of the questions about my specific 
involvement in these events. First, I left Enron on August 14, 
2001, for personal reasons. At the time I left the company, I 
fervently believed that Enron would continue to be successful 
in the future. I did not believe the company was in any 
imminent financial peril.
    Second, similarly, I did not dump any stock in Enron 
because I knew or even suspected that the company was in 
financial trouble. In fact, I left Enron holding about the same 
number of shares that I held at the beginning of 2001. On 
January 1, 2001, the start of my final year at Enron, I owned 
approximately 1.1 million shares of Enron stock. On August 14, 
the day I left, I owned about 940,000 shares of Enron stock. 
Indeed, in June of that year, I terminated an SEC sanctioned 
stock sell plan and elected to hold more Enron shares.
    Third, with regard to the so-called LJM Partnerships, the 
Powers report criticizes me for supposedly not taking a more 
active role in reviewing the conflict of interest arising from 
the involvement in those partnerships of Enron's then CFO. I 
believed at that time there were adequate controls in place to 
manage that conflict of interest, that the controls were being 
complied with, and that I was discharging, to the full extent 
of my mandate, my obligations to the Board with respect to that 
process.
    Fourth and finally, the Powers report also criticizes me 
for supposedly approving the restructuring of certain hedging 
transactions. The report then suggests that, ``If the account 
of other Enron employees is accurate, that transaction was 
designed to conceal losses on some of Enron's investments,'' 
and that I personally may have withheld information from the 
Board about that restructuring.
    I can state here today that I did not have any knowledge 
that the transaction was designated to conceal losses, and I 
did not do anything to withhold information from the Board of 
Directors of Enron Corporation.
    Ours was a company that emphasized creativity but always in 
a manner that relied on the advice of the best people we could 
find, both those inside the company and the lawyers and 
accountants outside the company who advised us.
    With that, Mr. Chairman, I am prepared to answer any 
questions that you may have.
    [The prepared statement of Jeffrey K. Skilling follows:]
   Prepared Statement of Jeffrey Skilling, Former President and CEO, 
                              Enron, Corp.
    Good morning Chairman Greenwood and members of the Committee. My 
name is Jeff Skilling. I worked for Enron for over 10 years, leaving in 
August of 2001 after being CEO for six months.
    During my time at Enron, I was immensely proud of what we 
accomplished. We believed that we were changing an industry, creating 
jobs, helping resuscitate a stagnant energy sector, and, by bringing 
choice to a monopoly-dominated industry, were trying to save consumers 
and small businesses billions of dollars each year. We believed 
fiercely in what we were doing.
    But today, after thousands of people have lost jobs; thousands have 
lost money--and, most tragically, my best friend has taken his own 
life, it all looks very different. As proud as I was of what we tried 
to accomplish at Enron, as I sit here today, I am devastated by, and 
apologetic about, what our company has come to represent. I know that 
no words can make things right. Too many have been hurt too much.
    I am here today, because I think Enron's employees, shareholders, 
and the public at large have a right to know about what happened. I 
have done all I can to help this investigation. I have testified for 
two days at the SEC--spoken on three occasions to the Special Board 
Committee--and have spoken to the staff of this Committee. I have not 
exercised my rights to refuse to answer a single question--not one. And 
I don't intend to start now.
    So, let me first talk about Enron and its demise.
    First, contrary to the refrain in the press, while I was at Enron, 
I was not aware of any inappropriate financing arrangements, designed 
to conceal liabilities, or overstate earnings. The off-balance sheet 
entities or SPE's that have gotten so much attention are commonplace in 
corporate America; and if properly established, they can effectively 
shift risk from a company's shareholders to others who have a different 
risk/reward preference. As a result, the financial statements issued by 
Enron, as far as I knew, accurately reflected the financial condition 
of the company.
    Second, it is my belief that Enron's failure was due to a classic 
``run on the bank:'' a liquidity crisis spurred by a lack of confidence 
in the company. At the time of Enron's collapse, the company was 
solvent and highly profitable--but, apparently, not liquid enough. That 
is my view of the principal cause of its failure.
    Now, let me address some of the questions about my specific 
involvement in these events.
    First, I left Enron on August 14, 2001 for personal reasons. At the 
time I left the company, I fervently believed that Enron would continue 
to be successful in the future. I did not believe that the company was 
in financial peril.
    Second, similarly, I did not ``dump'' any stock in Enron because I 
knew--or even suspected--that the company was in financial trouble. In 
fact, I left Enron holding almost the same number of shares that I held 
at the beginning of 2001: On January 1, 2001--the start of my final 
year at Enron--I owned approximately 1.1 million shares of Enron. On 
August 14, the day I left, I owned about 940,000 shares. Indeed, in 
June of that year, I terminated an SEC-sanctioned stock sale plan, and 
elected to hold on to more Enron shares.
    Third, with regard to the so-called LJM Partnerships, the Powers 
Report criticizes me for supposedly not taking a more active role in 
reviewing the conflict of interest arising from the involvement in 
those partnerships of Enron's then CFO. I believed at that time that 
there were adequate controls in place--that the controls were being 
complied with and that I was discharging--to the full extent of my 
mandate--my obligations to the Board with respect to this process.
    Fourth and finally, the Powers Report also criticizes me for 
supposedly ``approving'' the restructuring of certain hedging 
transactions. The Report then suggests that ``if the account of other 
Enron employees is accurate,'' that transaction ``was designed to 
conceal'' losses on some of Enron's investments and that I may have 
withheld information from the Board about that restructuring. I can 
state here today that I did not have any knowledge that that 
transaction was designed to conceal losses, and I did not do anything 
to withhold information from the Board.
    Ours was a company that emphasized creativity, but always in a 
manner that relied on the advice of the best people we could find--both 
those inside the company and the lawyers and accountants outside the 
company who advised us.
    With that, Mr. Chairman, I am prepared to answer any questions that 
you may have.

    Mr. Greenwood. Thank you, Mr. Skilling.
    Mr. Jaedicke, do you have an opening statement, sir? You 
are recognized for that opening statement.

                 TESTIMONY OF ROBERT K. JAEDICKE

    Mr. Jaedicke. Chairman Greenwood, Congressman Deutsch, and 
members of the subcommittee, good afternoon, and thank you for 
the opportunity to address the subcommittee.
    I am the Chairman of the Audit Committee of the Board of 
Directors of Enron Corporation. I have held that position since 
the mid-1980's. Let me tell you about my background. I joined 
the faculty of the Stanford Graduate School of Business in 
1961. I served as dean of the school from 1983 to 1990, and at 
that time I returned to the faculty of the business school and 
retired in 1992.
    Throughout my tenure as Chairman of the Enron Board's Audit 
Committee, I have been committed to ensuring that it is an 
effective and actively functioning body. Over the last few 
years, we undertook to review and strengthen our already 
vigorous control systems. In 1999, we began a number of 
initiatives to ensure that we remained a best practices Audit 
Committee.
    Throughout 2000 and into 2001, our committee worked with 
Arthur Andersen to make certain we complied with the 
recommendations of the Securities and Exchange Commission, the 
New York Stock Exchange, and the Blue Ribbon Committee on 
Improving the Effectiveness of Corporate Audit Committees. That 
effort culminated in February 2001 when the Audit Committee 
finalized a new charter which was approved by the full board.
    Throughout that lengthy process involving both Enron 
management and Arthur Andersen, we implemented a series of 
further refinements to our corporate policies and controls. The 
life blood of the work of any audit committee is the 
development and implementation of adequate controls, many of 
which cross-check each other.
    And the oversight function of the committee depends on the 
full and complete reporting of information to it. Without full 
and accurate information, an audit committee cannot function.
    I have now read the Report of the Special Committee. What 
comes across to me most clearly is that the controls the Board 
put in place to monitor these transactions broke down. Enron 
management, Arthur Andersen, the internal legal department, 
each had a role in our systems and controls. The Report of the 
Special Committee sets forth many instances where they did not 
fulfill their duty to us.
    We put in place multiple controls involving numerous 
parties, because we are aware that one check may not be 
sufficient. We could not have predicted that all controls would 
fail.
    The Special Committee concludes that the Audit Committee 
and the Board failed in their duties to oversee these 
transactions, and that we were insufficiently vigilant. I do 
not agree with that conclusion.
    As the Special Committee found, the Board understood that 
these were special transactions, and we reviewed the economic 
benefits to Enron. We established numerous controls to ensure 
that these transactions were properly structured, executed, 
reviewed, and reported, and the Board reasonably believed that 
these controls were adequate and would work.
    The Board was entitled to rely on these controls. The 
successful implementation of these controls turned on 
management's and outside consultants' thorough evaluation and 
review of these transactions, and full reporting back to the 
Board.
    As stated in the Report of the Special Committee, internal 
management and outside advisors did not raise concerns with the 
Board, and they regularly assured us that the transactions had 
been reviewed and that they were lawful and appropriate. It is 
now clear that management and the outside consultants failed to 
disclose critical information about these transactions of which 
they were clearly aware.
    After reading the report, I would like to add that if even 
some of the Board's controls had worked as expected, I believe 
that we could have addressed these issues and avoided this 
terrible tragedy.
    Thank you very much.
    [The prepared statement of Robert K. Jaedicke follows:]
 Prepared Statement of Robert K. Jaedicke, Chairman, Audit Committee, 
                 Board of Directors, Enron Corporation
    Chairman Greenwood, Congressman Deutsch, and Members of the 
Subcommittee. Good afternoon, and thank you for the opportunity to 
address the Subcommittee.
    I am the Chairman of the Audit Committee of the Board of Directors 
of Enron Corporation. I have held that position since the mid-1980s.Let 
me tell you about my background. I joined the faculty of the Stanford 
Graduate School of Busness in 1961. I served as Dean of the Business 
School from 1983 until 1990. At that time, I returned to the faculty of 
the Business School, and retired in 1992.
    Throughout my tenure as Chairman of the Enron Board's Audit 
Committee, I have been committed to ensuring that it is an effective 
and actively functioning body. Over the last few years, we undertook to 
review and strengthen our already vigorous control systems. In 1999, we 
began a number of initiatives to ensure that we remained a ``best 
practices'' Audit Committee. Throughout 2000 and into 2001, our 
committee worked with Arthur Andersen to make certain we complied with 
the recommendations of the Securities and Exchange Commission, the New 
York Stock Exchange, and the Blue Ribbon Committee on Improving the 
Effectiveness of Corporate Audit Committees. That effort culminated in 
February 2001, when the Audit Committee finalized a new charter which 
was approved by the full Board. Throughout that lengthy process, 
involving both Enron management and Arthur Andersen, we implemented a 
series of further refinements to our corporate policies and controls.
    The lifeblood of the work of any Audit Committee is the development 
and implementation of adequate controls, many of which cross check each 
other. And the oversight function of the Committee depends on the full 
and complete reporting of information to it. Without full and accurate 
information, an Audit Committee cannot be effective.
    I have now read the report of the Special Committee. What comes 
across to me most clearly is that the controls the Board put in place 
to monitor these transactions broke down. Enron management, Arthur 
Andersen, the internal legal department--each had a role in our systems 
of controls. The Report of the Special Committee sets forth many 
instances where they did not fulfill their duty to us. We put in place 
multiple controls involving of numerous parties, because we are aware 
that one check may not be sufficient. We could not have predicted that 
all the controls would fail.
    The Special Committee concludes that the Audit Committee and the 
Board failed in their duties to oversee these transactions, and that we 
were insufficiently vigilant. I do not accept that conclusion. As the 
Special Committee found:

 The Board understood that these were special transactions and 
        we reviewed their economic benefit to Enron. We established 
        numerous controls to ensure that these transactions were 
        properly structured, executed, reviewed, and reported, and the 
        Board reasonably believed that these controls were adequate and 
        would work.
 The Board was entitled to rely on these controls, and the 
        successful implementation of these controls turned on 
        management's and outside consultants' thorough evaluation and 
        review of these transactions, and fully reporting back to the 
        Board.
 As stated in the Report of the Special Committee, internal 
        management and outside advisors did not raise concerns with the 
        Board; regularly assured us that the transactions had been 
        reviewed and that they were lawful and appropriate.
 It is now clear that management and the outside consultants 
        failed to disclose critical information about these 
        transactions of which they were clearly aware.
    After reading the Report, I would like to add that if even some of 
the Board's had controls worked as expected, I believe that we could 
have addressed these issues and avoided this terrible tragedy.
                     a. role of the audit committee
    There has been much written of late about the role of Audit 
Committees, and about the performance of the Enron Audit Committee in 
this matter. I would like to comment about what we are and what we are 
not. The Audit Committee's function is one of oversight. Its 
responsibility is to receive reports from management and the outside 
auditors, to review the adequacy of internal controls, and to oversee 
the filing of financial statements. We do not work full time in this 
job. None of the members of the Audit Committee is an employee of 
Enron. We do not manage the Company. We do not do the auditing. We are 
not detectives.
    We held regular meetings, at which we received reports from a broad 
range of management and Arthur Andersen. There is an entire body of 
accounting literature known to Enron management and known to Arthur 
Andersen about the duties of those two groups to provide information to 
the Audit Committee and ultimately to the Board of Directors. We were 
entitled to rely on the representations made to us about the 
appropriateness of the accounting for the partnerships, and the 
adequacy of disclosure. We asked questions. We provided oversight, and 
set direction based on the information we received. I respectfully 
submit that we did our job.
    Arthur Andersen representatives attended each meeting of the Audit 
Committee. At each meeting, they made reports to us about issues of 
interest or concern. Further, it was my invariable practice to hold an 
executive session with the Arthur Andersen representatives, or at the 
very minimum offer one, where they could meet with us without 
management present. Arthur Andersen was free to report to the Committee 
any matters regarding the corporation and its financial affairs and 
records that made the auditors uncomfortable, including; (1) whether 
the auditors had had any significant disagreement with management; (2) 
whether the auditors had full cooperation of management; (3) whether 
reasonably effective accounting systems and controls were in place; (4) 
whether there are any material systems and controls that need 
strengthening; and (5) whether Arthur Andersen had detected instances 
where company policies had not been fully complied with. At each of 
these sessions, Arthur Andersen was given the opportunity to meet 
privately with the Committee outside the presence of management to 
discuss any of these matters. It now appears that Arthur Andersen had 
significant concern about Enron's financial practices, at least as 
early as February 2001, but failed to raise those concerns with the 
Audit Committee at that time.
    Over the last several weeks, through disclosures by this Committee, 
the media, and the Report of the Special Committee of the Board of 
Directors, I have learned that within the management of Enron and 
within Arthur Andersen, there was substantial turmoil about the 
partnerships that are the subject of these hearings. For example, until 
recently, I was unaware that:

 In February 2001, Arthur Andersen officials met and raised 
        concerns about the accounting for the partnerships;
 In the summer of 2001, an Enron in-house attorney was 
        sufficiently concerned about the partnerships that he consulted 
        with a separate law firm;
 In September or early October 2001, Arthur Andersen retained 
        outside counsel and formed a consultative group regarding these 
        partnerships;
 In October 2001, Arthur Andersen reportedly told a member of 
        management of Enron that Enron's soon to be released earnings 
        statement for the third quarter of 2001 could be fraudulent and 
        could bring SEC enforcement action.
    Contrast what Arthur Andersen knew and was doing during at that 
time with what it was telling the Audit Committee. In a February 12, 
2001 Audit Committee meeting, Arthur Andersen reported:

 That Arthur Andersen's financial statement opinion for the 
        2000 financial statements would be unqualified. The 2000 
        statements would cover the first full year of existence of the 
        LJM partnerships.
 That Arthur Andersen's opinion on the company's internal 
        controls would be unqualified.
 That the use of structured transactions and mark to market 
        accounting required significant judgment, but Arthur Andersen 
        did not suggest that anything about the judgments being made 
        was inappropriate.
 Arthur Andersen specifically reviewed with us the related 
        party transactions, and did not indicate any impropriety with 
        the accounting.
    In our October, 2001 Audit Committee meeting, Arthur Andersen told 
us that there were no material weaknesses in our internal controls.
          b. the report of the enron board's special committee
    Much of the focus of the hearings this week has been on the Report 
of the Special Investigative Committee, which was formed by Enron's 
Board of Directors to examine Related Party transactions entered into 
by Enron Corp. The Committee's investigation was both a thorough and 
impartial investigation into the transactions in question.
    In reading the report, I was deeply disturbed to learn of the 
marked lack of candor of both company management and our professional 
advisers concerning these transactions. The lifeblood of an effective 
Board is the ability to receive full and candid information by its 
outside advisors and management. It is clear now that substantial and 
critical information was in many instances concealed from the Board--
and in others was affirmatively misrepresented to us--by both company 
management and its outside advisers. This lack of full disclosure 
severely undermined the Board's effectiveness and oversight ability. No 
Board can properly execute its duties or make informed decisions 
without it.
    I want to highlight two critical pieces of information about these 
transactions that the Report concluded management did not reveal to the 
Board. First, the Special Committee determined in its Report that many 
Enron employees never disclosed to the Board that employees other than 
Andrew Fastow had acquired interests in, or become parties to, 
additional Related Party transactions with Enron. This dereliction of 
duty is a clear violation of the existing Code of Conduct applicable to 
all Enron employees. Of equal importance, as the Report makes clear, is 
that other Enron employees apparently knew about--but did not report to 
the Board--the existence of these undisclosed conflicts of interest. 
Neither the conduct of the employees who acquired these interests, nor 
the conduct of others who knew of it and failed to tell the Board, is 
in any way excusable.
    It is also apparent that Management's lack of candor was not 
limited simply to the non-disclosure of conflicting interests. 
According to the Report, many Enron employees believed that particular 
transactions with the LJM entities were unfair to Enron, were an 
improper effort to manipulate the company's financials, or were not 
properly being disclosed in Enron's proxy statements and financial 
disclosures. These are serious issues, and the Board was entitled to 
have them brought to its attention. These officers and employees may 
have made their objections known to other management, but that does not 
excuse their failure to bring these problems to or to notify properly 
the Board so that it could address them. This marked disregard for the 
Company's best interests--and for the Board's directives--is deeply 
disturbing.
    With respect to the various transactions that were the subject of 
the Special Committee Report, I would like to make a few comments about 
what the Board did, why we did it, and what we knew at the time. I want 
to first address the current criticism directed at Enron's use of 
widely-accepted and well-established off balance sheet financing or 
special purpose vehicles to raise money. This practice is permitted by 
the accounting rules (if structured correctly). Many companies use off-
balance sheet financing every day. Enron's extensive use of off-balance 
sheet financing was widely known and well-publicized.
    Now, let me begin with the earliest Enron transaction at issue, 
which was in 1997 and involved an entity called Chewco.
1. Chewco
    The Chewco transaction was part of Enron's restatement of its 
financial statements last November, when it was determined by Enron and 
Arthur Andersen accountants that Chewco was a related party that did 
not satisfy the accounting rules which permit an entity to remain 
unconsolidated. When the Board learned last fall that Chewco did not 
satisfy the SPE rules and Enron's financial statements had to be 
restated because of it, we were shocked. I do not recall the Board ever 
being made aware that Chewco was an affiliated transaction until last 
fall, and the Special Committee apparently found no evidence of anyone 
informing the Board of this critical fact.
    The Board had relied on senior management and its external 
advisers, including Arthur Andersen and Vinson & Elkins, to structure 
and account for the Chewco transaction. The Board had no reason to 
question the accounting for the Chewco transaction because, as far as 
the Board knew, Chewco was entirely unaffiliated with Enron, and 
Enron's internal and external auditors would ensure that it was 
properly accounted for.
    Yet these internal and external controls failed to bring to the 
Board's attention the critical fact that Michael Kopper, an Enron 
employee, had a interest in Chewco. To the contrary, the representation 
made to the Board was that Chewco was a completely unaffiliated third 
party. Those presenting this transaction in 1997 had to know this was 
untrue, and they had an obligation under Enron's Code of Conduct to 
disclose Mr. Kopper's involvement to the Board. According to the 
Special Committee Report, they did not. Had they done so, I am 
confident that we would have taken appropriate steps to avoid what 
ultimately happened.
2. LJM
    With the benefit of hindsight, the Report of the Special Committee 
concludes that the presence of extensive, Board-initiated controls over 
the LJM transactions should have signaled that the LJM structures 
should never have been approved from the outset. I disagree with this 
conclusion
    As noted in the Report, LJM1 and LJM2 were presented to the Board 
as having significant benefits to Enron. The Office of the Chairman 
determined that the LJM structure--with Mr. Fastow as the general 
partner of the LJMs' would not adversely affect the interests of the 
company. Senior management discussed with the Board the very real and 
substantial benefits to Enron of such a structure. The Board thought, 
based upon these presentations, that the LJM partnerships offered real 
business benefits to Enron that outweighed the potential risks. Even 
today, the Special Committee recognizes--as did the Board when it 
approved the LJM structure--that significant and legitimate economic 
benefits were presented to justify why Mr. Fastow should be permitted 
to assume the role that we ultimately permitted him to assume. The 
Special Committee can disagree with the Board's weighing of the 
benefits and potential risks of the LJM structure, but it cannot fairly 
be characterized as a decision that the Board was not entitled to make.
    I first want to note that the Board did not waive Enron's Code of 
Business Conduct when it approved Mr. Fastow's participation in LJM. 
Mr. Fastow was at all times bound by Enron's Code of Conduct, as well 
as its Code of Ethics, and Mr. Fastow always owed a fiduciary duty to 
act in the best interests of Enron Corporation. That Code of Conduct 
allows a senior officer to participate in a transaction in which he has 
a conflict of interest with Enron if the Office of the Chairman 
determines that this would not adversely affect the interests of the 
Company. Mr. Fastow was allowed to participate in LJM because the 
Office of the Chairman made such a determination, and the Board 
ratified it. This action had no affect whatsoever on Mr. Fastow's 
obligation to comply with all other requirements of Enron's Code of 
Business Conduct and its Code of Ethics as a senior officer and 
fiduciary of Enron, including the requirement that all LJM transactions 
be on terms fair to Enron and in its best interests
    In addition, the Board was certainly aware of the problems that 
could result from Mr. Fastow transacting business with Enron as the 
general partner of LJM. That is why the Board put in place an added 
layer of strict controls specifically for transactions between Enron 
and LJM. The controls established for LJM include the following:

1. Enron and LJM had no obligation to do business with each other.
2. Enron's Chief Accounting Officer, Mr. Fastow's equal in the 
        corporate structure, was to review and approve any 
        transactions.
3. Enron's Chief Risk Officer, also Mr. Fastow's equal in the corporate 
        structure, was to review and approve any transactions.
4. Jeff Skilling, President and Chief Operating Officer, and Mr. 
        Fastow's superior, also was to review and approve any 
        transactions.
5. Arthur Andersen was involved from the beginning in structuring and 
        accounting for these transactions to ensure that they were done 
        properly.
6. Once a year the Audit Committee reviewed the transactions that had 
        been completed in the prior year.
7. An LJM Approval Process Checklist was to be filled out to ensure 
        compliance with the Board's directive for transacting with LJM, 
        including questions regarding alternative sales options, a 
        determination that the transaction was conducted at arms-
        length, and review of the transaction by Enron's Office of the 
        Chairman, Chief Accounting Officer and Chief Risk Officer.
8. Enron employees who reported to Mr. Fastow were not permitted to 
        negotiate with LJM on behalf of Enron.
9. The Commercial, Legal and Accounting departments of Enron Global 
        Finance were to monitor compliance with the procedures and 
        controls, and were to regularly update the Chief Accounting and 
        Risk Officers.
10. Mr. Fastow was not relieved of his fiduciary duties to Enron.
11. The Office of the Chairman or the Board could ask Mr. Fastow to 
        resign from LJM at any time.
12. Mr. Skilling was to review Mr. Fastow's economic interest in Enron 
        and LJM.
13. Enron's internal and outside counsel were to regularly consult 
        regarding disclosure obligations concerning LJM, and were to 
        review any such disclosures.
    These are extraordinary controls. The Audit Committee was 
repeatedly assured by senior management and by Arthur Andersen that 
these controls were being followed. The Board was told, and had every 
reason to believe, that Jeff Skilling, Enron's President and Chief 
Operating Officer at the time, Richard Causey, Enron's Chief Accounting 
Officer, Richard Buy, Enron's Chief Risk Officer, and Arthur Andersen, 
Enron's auditor, were ensuring that the Board's policies were followed 
and that any transactions with LJM were fair to Enron and properly 
accounted for. The Board relied on Enron's accounting staff, external 
auditors and legal counsel to ensure the accuracy of Enron's 
disclosures in its proxy and financial statements. Unfortunately, it is 
now clear that our reliance--while reasonable and expected--was 
misplaced.
    Despite the existence of these controls, the Special Committee has 
found that numerous critical and troubling facts about LJM1 and LJM2 do 
not appear to have been brought to the attention of the Board or the 
Audit Committee, even though LJM was generally discussed at almost 
every meeting and there was a formal presentation and review once a 
year to the Audit and Finance Committees. Some of the facts about LJM 
that the Special Committee found appear to have been concealed from the 
Board are:

1. As with Chewco, the Board did not know that Michael Kopper was 
        involved in LJM. According to the Report, the Private Placement 
        Memorandum--which was reviewed by Enron's in-house lawyers and 
        by Vinson & Elkins--indicates that Michael Kopper would be 
        involved in managing LJM's day-to-day activities. Both Enron's 
        in-house lawyers and Vinson & Elkins, Enron's outside counsel, 
        apparently reviewed this memorandum, but failed to inform the 
        Board of what they learned.
2. The Board was not informed of and did not approve any other Enron 
        employees--besides Mr. Fastow--working for or having a 
        financial interest in LJM. It turns out that a number of other 
        employees--in violation of the Enron Code of Conduct--did work 
        for or took a financial interest in LJM.
3. The Board was not told that Enron sold seven assets to LJM1 and LJM2 
        in the third and fourth quarter of 1999, and then turned around 
        and repurchased five of those seven assets after the financial 
        reporting period closed. I do not believe any of those 
        repurchase transactions were presented to the Board for review.
4. The Board was not told that Enron agreed to protect LJM from losses 
        on any of its transactions with LJM.
5. The Board was not told that the requirement that only employees who 
        did not report to Fastow could negotiate with LJM on behalf of 
        Enron was ignored.
6. In early 2001, the Board was not told that the Raptor transactions 
        were several hundred million dollars undercapitalized, or that 
        management therefore intended to restructure those transactions 
        requiring issuance of some 800 million additional shares of 
        Enron stock.
7. Finally, the senior management and external advisors of Enron, on 
        whom the Board relied for information, never reported to the 
        Board that any of the LJM transactions were unfair to Enron, 
        involved questionable terms, or violated any accounting rules. 
        Instead, the Board and the Audit Committee were regularly told 
        by those who had no personal stake in LJM that all of the 
        controls were functioning properly, and that all of the 
        transactions being done were properly accounted for, were at 
        arms length and were fair to Enron.
    The Report itself makes clear that the controls established by the 
Board were not adequately executed, and important information was 
affirmatively concealed from the Board. The Audit Committee reviewed 
all of the LJM transactions with Enron's Chief Accounting Officer each 
year, in the presence of Arthur Andersen, and was assured that all of 
the transactions were done at arms length and were fair to Enron. The 
Board and the Audit Committee had no reason not to trust the assurances 
they received.
    Some now contend that we should have spent more time, and asked 
more questions. I can assure you that the controls and the transactions 
were given more than just a superficial review. Furthermore, they were 
reviewed by two committees. Considering the amount and seriousness of 
information that was concealed from us and misrepresented to us, I am 
not confident as I sit here today that we would have gotten to the 
truth with any amount of questioning and discussion. Nobody seems to be 
saying that they did not have an opportunity to inform us about the 
problems with Enron's related party transactions. They had plenty of 
opportunity to tell us the complete truth, we imposed numerous controls 
that required them to report to us fully and honestly--but they chose 
not to do so.
    The Report recognizes that a Board of Directors can fulfill its 
duty to act with due care either ``through one of its Committees or 
through the use of outside Consultants.'' The Board was, as the Report 
notes, repeatedly assured by its outside auditors, Arthur Andersen, 
that all of the Related Party transactions were on fair terms 
consistent with those available to Enron from Third Parties. 
Importantly, this was an audited representation by Arthur Andersen--and 
was made to the Board even in the face of significant, and undisclosed, 
internal concerns at Arthur Andersen that the transactions were not in 
fact on arms' length terms. During the relevant period I cannot 
remember Arthur Andersen expressing any concerns to the Board about the 
fairness or legitimacy of any of the related party transactions. 
Instead, Arthur Andersen repeatedly assured the Board, and specifically 
the Audit Committee, that it had reviewed the structuring of the 
transactions and that it was being proactive with respect to the 
accounting issues involved. For example, Arthur Andersen made the 
following assurances to the Board:

1. In October 1999, when LJM2 was approved, Arthur Andersen assured the 
        Audit Committee that it had spent considerable time during the 
        third quarter reviewing a joint venture Enron was forming to 
        assist in monetizing investments.
2. In presenting LJM2 to the Finance Committee in October 1999, senior 
        management discussed the fact that Arthur Andersen had reviewed 
        LJM2 and were fine with it.
3. In May 2000, Arthur Andersen reported to the Audit Committee that 
        Enron's related party transactions were a high priority area, 
        that Arthur Andersen would be spending additional time 
        specifically on Enron's structured transactions and hedging 
        vehicles, and that Arthur Andersen gets involved in these 
        structures at the front end to discuss applicable accounting 
        issues.
4. In December 2000, Arthur Andersen reported to the Audit Committee 
        that there were no significant audit adjustments to be made, no 
        disagreements with management and no significant difficulties 
        encountered during the audit.
    Arthur Andersen often mentioned that Enron was utilizing highly 
complex structured transactions that required significant judgment in 
the application of the accounting rules. Arthur Andersen assured us 
that they were working with their experts in Chicago to make sure that 
Enron properly accounted for those transactions.
    All the time that Arthur Andersen and senior management were 
assuring the Board that the controls were all being followed and the 
transactions were being done at arms length and were fair to Enron, 
many of the controls were in fact being completely ignored. Perhaps the 
most egregious example of this occurred in and around February 2001. 
According to the Report, sometime in the first quarter of 2001 it 
became clear to Enron management that the Raptor vehicles were no 
longer creditworthy. That meant that Enron was in danger of having to 
take an enormous charge to earnings. Senior management, however, did 
not come to the Board with this extremely serious problem. At the same 
time, Arthur Andersen held an internal meeting involving Houston and 
Chicago management on February 5, 2001, in which they discussed the 
fact that they had serious concerns about Enron's accounting. The next 
week, however, when Arthur Andersen came to meet with the Audit 
Committee, the Report concludes that they did not mention even a single 
concern to us. Instead, Arthur Andersen simply reported that their 
financial statements opinion would be unqualified, there were no 
significant accounting adjustments, there were no disagreements with 
management and that their opinion on Enron's internal controls would be 
unqualified and no material weaknesses had been identified.
    We now know that the Raptors were underwater by hundreds of 
millions of dollars in early 2001, and nobody brought that to the 
immediate attention of the Board or the Audit Committee. Instead, 
senior management entered into a transaction to provide $800 million of 
Enron stock in an attempt to prop up the failing Raptor structures. The 
Board was not told about this transaction at the time. I agree with the 
Report's conclusions that Arthur Andersen ``failed to provide the 
objective accounting judgment that should have prevented these 
transactions from going forward.'' (Report, p. 24-25).
              c. findings of the special committee report
    The Report clearly recognizes that the controls implemented by the 
Board were ``a genuine effort by the Board to satisfy itself that 
Enron's interests would be protected.'' (Report, p. 156). Importantly, 
as I have discussed, had the controls been adhered to--in particular 
the requirements that the terms be fair to Enron and obtained at arms' 
length--none of the transactions criticized in the Report would, or 
should, have occurred. Under no circumstances should it ever have been 
the case that LJM was guaranteed that it would never lose money. 
(Report, p. 135) Under no circumstances should a transaction have been 
approved that offered LJM2 the ``internal rates of return on the four 
Raptors of 193%, 278%, 2500% and a projected 125%.'' Report, p. 128) 
These returns were ``far in excess of the 30% annualized rate of return 
described in the May 1 2000 Finance Committee''--but none of the Enron 
employees who knew these facts disclosed them to the Board. (Report, p. 
128-29) The Board cannot be faulted for failing to act on information 
that was withheld from it, nor can it be faulted for failing to respond 
to information that was affirmatively misrepresented to it. (Report, p. 
156-58).
    I agree with the Report's conclusion that ``[t]he evidence 
available to us suggests that Andersen did not fulfill its professional 
responsibilities in connection with its audits of Enron's financial 
statements, or its obligation to bring to the attention of Enron's 
Board (or the Audit or Compliance Committee) concerns about Enron's 
internal controls over the related-party transactions.'' (Report, p. 
20) By necessity, Boards of Directors must rely--and the law allows 
them to rely--on outside advisers who are hired by the Board and owe 
their duties to the Board. As the Report found, Enron's Board of 
Directors ``reasonably relied on the professional judgment of Arthur 
Andersen concerning Enron's financial statements and the adequacy of 
internal controls. Andersen failed to meet its responsibility in both 
respects.'' (Report, p. 25) The Report's additional findings about 
Andersen's inexcusable failure to fulfill its professional duties 
include the following:

 ``It is particularly surprising that the accountants at 
        Andersen, who should have brought a measure of objectivity and 
        perspective to [the transactions] did not do so . . . and there 
        is no question that Andersen accountants were in a position to 
        understand all the critical features of the Raptors and offer 
        advice on the appropriate accounting treatment . . . Indeed, 
        there is abundant evidence that Andersen in fact offered Enron 
        advice at every step, from inception through restructuring and 
        ultimately to terminating the Raptors. Enron followed that 
        advice.'' (Report, p. 132) (emphasis added)
 ``Enron's outside auditors supposedly examined Enron's 
        internal controls, but did not identify or bring to the Audit 
        Committee's attention the inadequacies in their 
        implementation.'' (Report, p. 148).
 ``The Board was entitled to rely on assurances it received 
        that Enron's internal accountants and Andersen had fully 
        evaluated and approved the accounting treatment of the [Raptor] 
        transaction . . . The involvement of Enron's internal 
        accountants, and the reported (and actual) involvement of 
        Andersen, gave the Finance Committee and the Board reason to 
        presume that the transaction was proper. Raptor was an 
        extremely complex transaction, presented to the Committee by 
        advocates who conveyed confidence and assurance that the 
        proposal was in Enron's best interests. (Report, p. 156-18)
 ``The Board appears to have reasonably relied upon the 
        professional judgment of Andersen concerning Enron's financial 
        statements and the adequacy of controls for the related-party 
        transactions.'' (Report, p. 25)
    These statements establish, as the Report acknowledges, that the 
Board could and did discharge its obligations to understand and 
evaluate these transactions ``through its Outside Consultants,'' Arthur 
Andersen. That Andersen, in the words of the Report, ``failed to meet 
its responsibilities in both respects'' cannot be laid at the feet of 
the Board.
                             ii. conclusion
    The Board recognizes that these transactions had catastrophic 
consequences for Enron--in an environment already made difficult by 
investments that were otherwise performing poorly in its broadband, 
retail energy and water businesses. In retrospect, and with the 
knowledge of the duplicity of its employees and the failures of its 
advisers, the Board deeply wishes that it had never agreed to these 
transactions. The Board, however, did not--and could not--have foreseen 
that significant information about these transactions would be withheld 
from it.
    The Board cannot be faulted for failing to respond to information 
that was concealed from them, or that was actively misrepresented to 
them. It is not accurate to suggest that the Board ``did not 
effectively meet its obligation with respect to the LJM transactions'' 
when the record is replete with evidence that--without Board approval--
the most senior management of Enron was willing to enrich itself at 
company expense, to deceive the Board and to disregard its fiduciary 
obligations of candor to the Company and its shareholders. Indeed, it 
seems evident--from a review of the Chewco, Raptor and Southhampton 
transactions--that no amount of process or oversight would or could 
have prevented the actions of these employees.
    Of equal importance, there is absolutely no suggestion that the 
Board was in any way personally interested in these transactions. The 
Board acted at all times with a good faith belief that these 
transactions--though they presented risks--were in the company's best 
interests and were being carefully structured and reviewed by internal 
and external professionals to ensure that they were done properly.
    Finally, the Board did consider these transactions carefully, 
attended to the risks created by Mr. Fastow's conflict of interests, 
and was repeatedly assured by company management and by the company's 
advisers that these transactions were appropriate and in the Company's 
best interests. While others may differ with that business judgment, it 
is incorrect to imply that the Board's decision to authorize the 
transactions was reached carelessly or without considered attention to, 
and good faith reliance upon, the information made available to us at 
the time. This is the proper role of a board of directors--but it 
simply was not adequate to prevent the deliberate and improper actions 
of certain of the Company's employees.
    What happened at Enron has been described as a systemic failure. As 
it pertains to the Board, I see it instead as a cautionary reminder of 
the limits of a director's role. We served as directors of what was 
then the seventh largest corporation in America. Our job as directors 
was necessarily limited by the nature of Enron's enterprise--which was 
worldwide in scope, employed more than 20,000 people, and engaged in a 
vast array of trading and development activities. By force of 
necessity, we could not know personally all of the employees. As we now 
know, key employees whom we thought we knew proved to be dishonest or 
disloyal.
    The very magnitude of the enterprise requires directors to confine 
their control to the broad policy decisions. That we did this is clear 
from the record. At the meetings of the Board and its committees, in 
which all of us participated, these questions were considered and 
decided on the basis of summaries, reports and corporate records. These 
we were entitled to rely upon. Directors are also, as the Report 
recognizes, entitled to rely on the honesty and integrity of their 
subordinates and advisers until something occurs to put them on 
suspicion that something is wrong.
    We did all of this, and more. Sadly, despite all that we tried to 
do, in the face of all the assurances we received, we had no cause for 
suspicion until it was too late.
    Thank you.

    Mr. Greenwood. Thank you, Mr. Jaedicke.
    Mr. Winokur, do you have an opening statement?
    Mr. Winokur. Yes, sir.
    Mr. Greenwood. You are recognized, sir.

              TESTIMONY OF HERBERT S. WINOKUR, JR.

    Mr. Winokur. Chairman Greenwood, Congressman Deutsch, and 
members of the subcommittee, good afternoon, and thank you for 
the opportunity to address this group.
    My name is Herbert S. Winokur, Jr. I am Chairman of the 
Finance Committee of the Board of Directors of Enron, and have 
held that position for several years. I have been a Board 
member since the mid 1980's. I also was a member of the Special 
Investigative Committee of the Board, which issued what has 
become known now as the Powers report.
    Let me keep my opening remarks brief. The recent events 
involving Enron weigh heavily on me as they do on many people. 
I have given them much thought. Beyond anything else, I deeply 
regret the impact that Enron's decline has had on the lives of 
so many people--our employees and our shareholders.
    Like you and many others, I have been searching for 
explanations, answers, and lessons. I volunteered to be on 
Enron's Special Committee, the Board's Special Committee, 
because I wanted to find out what happened, what went wrong.
    You all have read the Powers report that resulted. It is 
the product of an intense effort to get to the bottom of many 
questions surrounding the related party transactions. The other 
directors on the Special Committee--Dean Powers and Ray Trobe--
and our legal and accounting advisors, essentially were 
strangers to Enron before the committee commenced its 
investigation. I want to thank them and commend them for 
undertaking the task and for their efforts and long hours.
    My role in the committee was unique. As a Director of Enron 
during the period investigated, my performance, and that of my 
fellow directors, was part of what was being reviewed. For this 
reason, as the report states, I did not participate in that 
part of the report relating to its assessment of the Board. I 
think it is clear from the report that it was no whitewash on 
any front.
    As a Board member, I am deeply disturbed by what the 
investigation revealed. The report makes clear that those in 
management on whom we relied to tell us the truth did not do 
so. Although I bear them no ill will, it appears that the 
outside experts at Arthur Andersen and Vinson & Elkins failed 
us and their professions as well.
    We, too, have been criticized for approving these 
transactions and for failing in our duties to oversee these 
relationships. Those criticisms have hit us hard, because I 
firmly believed at the time, and believe today, that the Board 
made a reasonable business judgment to permit Mr. Fastow to 
serve in these partnerships for one reason and one reason only. 
Based on the information presented to us and on the advice of 
our outside auditors and lawyers, we believed those 
transactions would be in the best interest of Enron and its 
shareholders.
    In the superheated environment surrounding the collapse of 
Enron, and in the face of the Powers report, I must, therefore, 
respectfully disagree with some aspects of the report relating 
to the Board's performance and corporate governance principles. 
What are these principles?
    The reality in the modern corporation is that directors 
cannot, and are not expected to, manage a company on a day-to-
day basis. Rather, to be a director is to direct. As directors, 
our role was to form general corporate policy and approve Enron 
management's strategic goals.
    We were required to do so on an informed basis, in good 
faith, and in the honest belief that the actions we took were 
in the best interest of Enron. In reaching our decisions, we 
are entitled--and the Powers report concurs--to rely on the 
information we received from management and our outside 
experts, such as Arthur Andersen and Vinson & Elkins that we 
believed to be honest and reliable.
    The report makes clear that the directors were acting in 
good faith when we approved these transactions. We had no 
personal interest in them, and we honestly believed that these 
transactions, though not without risk, were in the best 
interest of Enron shareholders. With the benefit of hindsight, 
the report criticizes our decision, but our business decision 
can only be evaluated based on the facts known to us at the 
time when we made it.
    In this regard, I think the following points are important. 
First, as a Board, we were told by management and believed that 
this arrangement offered substantial benefits to the company 
and its shareholders in terms of supplying an entirely 
optional, quick, and efficient source of capital for Enron. We 
were told that our counsel and Arthur Andersen concurred in the 
judgment that the structures were appropriate.
    We recognized the risk of having Mr. Fastow involved in a 
transaction with Enron and put in place supplemental controls 
to manage those risks. I will mention two of those today.
    The Chief Risk Officer, Mr. Buy, and the Chief Accounting 
Officer, Mr. Causey, were to review each LJM transaction 
independently to ensure that they were fair to Enron and on 
arms length terms.
    Second, Mr. Fastow remained a fiduciary to Enron under the 
code of conduct. He, therefore, was required at all times to 
put Enron's interest ahead of his own. The basic controls 
already in place at Enron remained as well. The transaction 
approval process required Board approval of all transactions in 
excess of $75 million. Had this control been followed, the 
Raptor III and Raptor recapitalization transactions, which the 
Powers report says were concealed from the Board, could never 
have occurred.
    The code of conduct which prohibited related party 
transactions without the approval of the CEO remained in effect 
as well. Had this control been followed, neither the Chewco nor 
the Southhampton transactions, both of which also were 
concealed from the Board, could not have occurred. Neither of 
the transactions could have occurred.
    Third, the regular credit risk reports we received in the 
Finance Committee should have informed us of the credit 
problems at Raptor. Mr. Buy knew this, but at no time that I 
can identify did any LJM transaction appear on our top 25 
credit exposures list, even though the credit risk in these 
transactions, as we now learned, was massive and should have 
been disclosed.
    Next, Arthur Andersen's responsibility to audit our 
financial statements, and the disclosure of related party 
matters, should have, but did not, reveal to the Board another 
fact that we did not know--that a number of investments were 
repeatedly being sold to and then repurchased from LJM.
    Finally, Arthur Andersen's internal controls audit should 
have revealed all of these transactions to us, as they were all 
transactions to which existing or enhanced controls applied. I 
still do not understand why over a period of years Arthur 
Andersen did not tell either the Audit Committee or the Board 
that the controls we had put in place were not being followed.
    The Powers report was an important first step in 
understanding what happened at Enron. We, as the Board, 
commissioned that report in an effort to get at the truth. As 
Board members, Dr. Jaedicke and I are here today to continue 
our dialog with you and the American people about what happened 
at Enron and how it can be prevented in the future.
    I thank the committee for inviting us here today and look 
forward to a productive discussion of these important issues. 
Thank you.
    [The prepared statement of Herbert S. Winokur, Jr. 
follows:]
   Prepared Statement of Herbert S. Winokur, Jr., Chairman, Finance 
                  Committee, Board of Directors, Enron
    Chairman Greenwood, Congressman Deutsch, and Members of the 
Subcommittee. Good afternoon, and thank you for the opportunity to 
address the Subcommittee.
    I am the Chairman of the Finance Committee of the Board of 
Directors of Enron. I have held this position for several years.
                            i. introduction
    On October 16, 2001, Enron announced that it was taking a $544 
million after-tax charge against earnings related to transactions with 
LJM2, a partnership created and managed by Enron's CFO, Andrew Fastow. 
On the same day Ken Lay announced at an analysts' meeting that, in 
connection with the same transactions, it would take a $1.2 billion 
non-cash reduction to shareholder equity. Two weeks later, in order to 
learn how these losses had been incurred, the Board of Enron Corp. 
appointed a Special Investigative Committee. At that time, we committed 
to make public the results of that investigation. We did so on 
Saturday, when the Board authorized the release of a 217 page report 
detailing the Committee's investigations and findings.
    I must tell you that I, as a member of the Special Investigative 
Committee and more generally as an independent member of the Board, 
have been deeply disturbed by what the investigation revealed. The 
Report makes clear that those in management on whom we relied to tell 
us the truth did not do so. The outside experts at Arthur Andersen and 
at Vinson & Elkins failed us, and their professions, as well. We, too, 
have been criticized for approving these transactions and for failing 
in our duties to oversee these relationships. Those criticisms have hit 
us hard, because I firmly believed at the time--and believe today--that 
the Board made the business judgment to permit Mr. Fastow to serve in 
these partnerships for one reason and one reason only: Based upon the 
information presented to us, and upon the advice of our outside 
auditors and lawyers, we believed these transactions would be in the 
best interests of Enron and its shareholders. That this turned out to 
be untrue has been devastating to all of us.
    I volunteered to serve on the Special Investigative Committee 
because I wanted to find answers to why this occurred. The Committee's 
Report was an important first step in that process, but it was only a 
step. This is our next step. Dr. Jaedicke and I are here today, 
voluntarily, to continue to share with the members of this Subcommittee 
what we now know about what happened at Enron.
    We come here, of course, as independent members of a corporate 
board of directors. The reality in the modern corporation is that 
directors cannot, and are not expected to, manage a company on a day to 
day basis. Rather, to be a director is to direct. As directors, our 
role was to form general corporate policy and to approve Enron 
management's strategic goals. We were required to do so on an informed 
basis, in good faith and in the honest belief that the actions we took 
were in the best interest of Enron. We then delegated to the company 
management and its outside advisors the responsibility to carry out our 
directions. Importantly, an informed decision to delegate 
responsibility is as much an exercise of business judgment as any 
other.
    The Report makes clear that the directors were acting in good faith 
when they approved these transactions. It also recognizes that we as a 
Board held an honest belief that these transactions--although not 
without risk--were in the best interests of Enron's shareholders. The 
Report acknowledges that this was our independent business judgment, 
formed in consultation with outside experts from Arthur Andersen and 
Vinson Elkins, on which we were--and are--entitled to rely. With the 
benefit of hindsight, my colleagues on the Special Committee, without 
my participation, disagree with some of the decisions made by the 
Board, but they offer no suggestion that the Board did not act honestly 
and in good faith in approving these structures.
    The Report questions whether we acted on an informed basis and 
suggests that we failed properly to oversee these transactions after 
they had been approved. I respectfully disagree. It is unfair to 
suggest we were uninformed simply because it has now become apparent 
that we were deceived. Our business decision can only be evaluated 
based upon the facts known to us at the time we made it. I am prepared 
today to answer questions both about the decisions we made, the 
controls we put in place, and the information we received, so that you 
and the public will understand that we sought to fulfill our duty while 
using what was our best business judgment.
    A number of senior Enron employees, we now know, did not tell us--
the full truth. Our accountants at Arthur Andersen, and our lawyers at 
Vinson & Elkins, we now know, did not provide good advice to us. The 
related party arrangements were terribly abused. I feel, however, that 
the tragedy of Enron's bankruptcy might well have been avoided if the 
controls we put in place had been followed as we intended, and if the 
important transactions about which we were not informed had not 
occurred. But I assure you that my colleagues and I, at the time, did 
our best to understand the risks and benefits involved in permitting 
Mr. Fastow to become the general partner of the LJM partnerships.
    With that in mind, I would like to turn to a general discussion of 
three areas. The first is to describe how the Enron Board of Directors 
went about discharging its obligations to act in the company's best 
interests. The second summarizes the controls we had put in place--both 
generally and specifically with regard to these transactions--to 
contain and measure accurately the risks and rewards of Enron's 
business activity. Finally, I would like to discuss the specific 
circumstances in which we approved the LJM structures and--of equal 
importance--will share with you the important facts that were concealed 
from us at the time.
                             ii. discussion
A. Enron's Management Direction
    Enron's Board of Directors was composed of 12 independent directors 
and two inside directors, Kenneth Lay and Jeffrey Skilling. Many had 
advanced degrees. Others have significant government and regulatory 
experience. Still others are the heads of major corporate and non-
profit organizations. My colleagues on the Board are highly 
accomplished in their fields, are highly intelligent, and, I believe, 
highly ethical as well. As a Board, we worked well as a unit to help 
move Enron forward into a new business environment characterized by 
increased globalization of investment, rapid regulatory and 
technological change, and increased sophistication in the capital 
markets.
    To some extent, as now has been learned, by early 2001 Enron's 
reach had exceeded its grasp. Business decisions that made sense at the 
time, such as the building of an extensive broadband network, or 
Enron's entry into developing markets abroad, did not work out. Other 
broadband companies, such as Level 3 and Qwest, have experienced severe 
declines in the price of their stock as the demand for bandwidth dried 
up. Global Crossing, another broadband company, is--like Enron--in 
bankruptcy. Our initiatives in power and water deregulation abroad were 
also less productive than we believed they would be. But companies such 
as AES also have seen significant declines in their stock prices. At 
the time, however, Enron's expansions were hailed in the media as 
brilliant initiatives. Over the decade of the 1990's, Enron became the 
dominant company in providing electricity and gas to customers around 
the world.
    I raise this to make an important point. Enron, as a company, took 
a number of business and financial risks. These risks were disclosed in 
our Form 10-Ks. They were also recognized by the analysts and rating 
agencies who followed the company. To suggest otherwise is to ignore 
the disclosed, and well-publicized facts about Enron and its business 
strategy.
B. Enron's Internal Controls
    Although the Company took risks, it also took careful steps to 
monitor and contain those risks. Enron had a significant risk 
management function called ``Risk Assessment Control.'' Under the 
leadership of Rick Buy, this department employed over 100 people whose 
responsibility it was to measure the risks of Enron's trading 
operations, to assess the valuation of its assets and approve the 
valuation of contracts and assets, and to assess the credit-worthiness 
of Enron's trading counterparties--including the LJM entities.
    The Finance Committee met regularly five times per year for 1\1/2\-
2--hours typically the afternoon before each regular Board meeting. Our 
formal responsibilities were to recommend to the Board Enron's 
financial policies and to monitor its financial affairs. In that 
capacity, we received regular reports concerning proposed transactions, 
various credit ratios, Enron's value at risk modeling--which was an 
assessment of the unrealized risks of its trading operation--its 
liquidity, measures of borrowing cost and risk from capital markets, 
and its balance sheet. The Board's efforts to monitor Enron's risk 
activities were highly successful.
    We also were available to management, when asked, to review 
possible pending transactions. On several occasions, management 
informally proposed and later withdrew large investment opportunities 
from consideration when committee members expressed their disapproval.
    Of equal importance, our attention to risk control and the 
questions asked at presentations to the Board enabled us to identify 
and ask management to remedy problems within the risk management 
activities of an Enron retail power subsidiary, EES. As has been 
discussed in the press, the Board acted to remedy these problems when 
they were detected. Enron consolidated the risk management functions of 
the retail unit into that of the larger wholesale division--and 
disclosed the resulting restatement of results in the Form 10Q for the 
first Quarter of January 2001.
    In addition to the Risk Assessment Control procedures, the Board 
implemented transaction approval controls. These included both general 
controls and additional controls specific to the LJM transactions.
    Enron's general transaction approval process incorporated written 
presentations and various levels of required executive approvals. The 
written presentation was in the form of a Deal Approval Sheet, called a 
DASH. The DASH set out, in detail, the economic basis of significant 
transactions by Enron. It required the business unit to set out the 
merits and risks of any proposed investment, to explain its strategic 
purpose for Enron, to discuss its funding sources and to set out its 
projected returns. Depending upon the size of a given transaction, 
approvals at various levels were required. In the time frame at issue 
for the LJM transactions, new business in an amount greater than $25 
million required Board approval. Below that level, at various 
breakpoints, approvals were required from the CEO or the business unit 
heads. Investments of between $25 million and $75 million required the 
approval of the Office of the Chairman. Investments in existing 
businesses above a $75 million threshold required the approval of 
Enron's Board.
C. Special Controls for the LJM Partnerships
    Even before the LJM matters were brought to the Board, Enron 
maintained a code of conduct for its employees, which required annual 
certification as to their compliance.
    In addition to the regular deal approval process and the code of 
conduct, we imposed specific controls related to the LJM transactions. 
These controls were extensive and robust. They included a requirement 
that both the Chief Accounting Officer, Rick Causey, and the Chief Risk 
Officer, Rick Buy, review and approve the merits of each transaction to 
be sure the terms were fair to Enron, were negotiated at arms' length, 
and that the accounting treatment was correct. Under the Code of 
Conduct, and under the procedures we implemented, each transaction also 
required a separate approval from the CEO or his delegate before it 
could proceed. That approval should not have been given to any 
transaction that was not absolutely fair to Enron and in its best 
interest. Approval was also required from internal and external legal 
counsel and from our external auditors, Arthur Andersen. Specific 
additional disclosure requirements as mandated by the SEC were subject 
to Andersen's and Vinson & Elkins' review, as well.
    An additional structural control we imposed was that transactions 
with LJM were entirely optional. The business unit heads--whose 
compensation and incentives were outside Mr. Fastow's control--had 
every incentive to maximize the value they received in any sale of 
their assets. Unless they truly believed that a transaction was in the 
best interest of the company, there was no reason for them to do 
business with LJM, because it would directly, and adversely, affect 
their compensation if they failed to maximize Enron's value.
    We also required the Office of the Chair to remain in control of 
Mr. Fastow's participation. This was important because Mr. Fastow 
explicitly acknowledged that he remained a fiduciary to Enron. In order 
to ensure that this duty was honored, Messrs. Skilling and Lay were 
given the authority to require Mr. Fastow to resign at any time from 
his involvement with LJM. Mr. Skilling also was charged with the 
responsibility to supervise Mr. Fastow's involvement, to make sure it 
did not become a disruption to the company and to ensure that his 
compensation from the LJM transactions was moderate. Mr. Skilling 
reported to us that he was discharging these obligations; it now 
appears that he did not do so.
    There is no doubt that senior management, our outside accountants, 
and lawyers who were involved in these transactions understood these 
requirements. In fact, Enron created an additional and special LJM Deal 
Approval sheet specifically to verify that each and every LJM 
transaction complied with the internal controls that the Board had 
imposed. These requirements, like the regular transaction approval 
requirements, applied at all times to the LJM transactions, and the 
responsible people at the Company and Arthur Andersen knew this. We 
were repeatedly assured by both management and Andersen and Vinson & 
Elkins that these internal controls were being followed, that the 
transactions were indeed at arms' length and fair to Enron and that the 
company was realizing real and legitimate economic benefit from these 
transactions.
    I describe the Risk Management system in detail because it was an 
important part of how the Board and the Finance Committees evaluated 
the risks associated with the LJM partnerships. That will become 
apparent, as I will now turn to the specific LJM transactions that were 
the subject of the Special Committee's report.
D. Transactions Discussed in the Special Committee Report
1. The Rhythms Net Connection Transaction
    Enron had within its portfolio certain highly volatile investments, 
such as Rhythms NetConnection. Enron, as has been discussed, was 
required to use mark to market accounting on its ``merchant'' 
investments. That combination of volatile investments and mark to 
market accounting created instability and unpredictability in the 
Company's income statement. Putting in place hedges to mitigate and 
stabilize those risks was an important and sound thing to do. I don't 
think anyone can seriously question that Enron should have taken steps 
to hedge its risks. Indeed, just this week, I learned that the 
directors of Ford were sued by a class of shareholders because they 
failed to put in place hedges on significant and volatile investments 
in metals Ford used in catalytic converters.
    The Special Committee was highly critical of Enron's decision to 
use forward contracts on its own stock in its hedging activities. I 
make the following observations.
    First, the Report recognizes that at the time these transactions 
were authorized, Enron had significant unrealized value in forward 
contracts previously issued on its own stock. These forward contracts 
were written by Enron in order to hedge the expense of Enron's stock-
based incentive compensation plan. In simple terms, Enron wrote 
forwards at today's prices in order to protect itself against the risk 
that its stock would appreciate in value and thus make its incentive 
compensation plan more expensive. The Report does not criticize this 
decision. I believe that this is a common business practice.
    The Report also notes that these forward hedges had been very 
successful. As a result of the appreciation of Enron's stock price, 
Enron was now able to purchase Enron stock at a substantial discount to 
the then existing market price. In fact, the value in these forwards--
called the UBS forwards in the presentations made to us--was in the 
hundreds of millions of dollars. That value was an asset to Enron's 
shareholders. We were told, both by the company's management and by its 
accountants, that the most effective way to capture this value was to 
use this asset to support hedging transactions with a third party.
    The Report contends, based on advice from the Special Committee's 
accounting consultants, Deloitte & Touche, that Enron's decision to use 
the forward contracts to hedge other risks was improper. It is not 
specific as to why this is so. It does not specify which accounting 
rules, in particular, were allegedly violated by this practice. Nor did 
the Special Committee know whether Deloitte as a firm agreed with its 
consultants' conclusions. In my view, it is more important to bear in 
mind what the Board actually knew when it made this decision.
    What I knew was this. As a director, I was told that the Company 
had assets--in the form of forward contracts--that had appreciated 
significantly in value. I believed it made sense to try to find a way 
to use that value most effectively for the benefit of the shareholders. 
I, like the others on the Board, turned to Arthur Andersen for advice 
concerning whether the transactions being proposed made sense from an 
accounting perspective. As has been said by Andersen officials in 
testimony, Arthur Andersen was ``very much involved in giving [its] 
advice as to whether these structures passed the accounting rules.'' 
The Report is even more explicit: ``There is abundant evidence that 
Andersen in fact offered Enron advice at every step, from inception 
through restructuring and ultimately to terminating the Raptors. Enron 
followed that advice.''
    As Board members, we fulfill our duty to the shareholders when we 
act ``through one of [our] Committees or through the use of outside 
Consultants.'' We relied on Arthur Andersen to assure us that these 
transactions were appropriate and permissible. They assured us they 
were. The Rhythms Net hedge also was the subject of a separate fairness 
opinion by PriceWaterhouse Coopers. The Rhythms Net transaction with 
LJM, as with all of the hedging transactions that were disclosed to us, 
were heavily scrutinized by our inside and outside counsel. As a 
result, until these transactions were restated, we had no reason to 
believe these transactions were in any way improper or impermissible.
    Let me be absolutely clear. I knew that Rhythms Net, and later the 
Raptor transactions, involved the use of forwards on Enron stock. That 
fact was also disclosed in Enron's public filings. This matter is set 
out in Enron's regulatory filings, in disclosures that Arthur Andersen 
and Vinson & Elkins assured us were both sufficient and proper. What I 
did not then know is what the accounting consultants to the Special 
Committee now have said, namely that in their opinion this wasn't 
permitted under the accounting rules.
    Media accounts of the Special Committee report seemed to imply that 
the Board of Directors knew that the LJM transactions, in particular 
the Raptor hedges, were undertaken for the purpose of creating 
fictitious earnings. I could not disagree more.
    The transactions that were presented to us--and many were not--were 
presented as valid economic hedges of Enron's risks, using the gains in 
the Enron stock forward positions. I want to make clear that I never 
understood, and was not told, that the business purpose of entering 
into the LJM transactions was to create fictitious earnings. Quite the 
contrary, I was told that the LJM transactions were being undertaken to 
hedge the risks and volatility of our assets, and to assist Enron in 
obtaining additional third-party debt and equity capital on favorable 
terms to Enron shareholders to support the company's growth.
    The Report concludes otherwise, based in part on an unverified 
handwritten note by the corporate secretary, to the effect that a 
particular Raptor transaction ``does not transfer economic risk but 
transfers P & L volatility.'' From that single reference, which is 
inconsistent with the very document on which it is written, the Report 
generalizes that the Board knew these hedges did not really shift risk. 
That note is inconsistent with my recollection of the events at that 
meeting, and with the minutes of the meeting, prepared by the same 
secretary, that were approved and ratified by the committee as a whole.
    Of equal importance, I am aware of specific representations to the 
Board that controvert the contention that the Board understood these 
hedges weren't real hedges. First, in an Audit Committee meeting--in 
the presence of Arthur Andersen--the Audit Committee was advised that 
the LJM transactions were not earnings related but were, instead, 
primarily related to deconsolidations, securitizations or monetizations 
of assets. Arthur Andersen did not disagree with this statement. 
Second, as I indicated earlier, every presentation of the LJM and 
Raptor transactions described them as financial hedges for Enron's 
risks. If the hedges were imperfect, or if they were impermissible 
under the accounting rules, no one made the Board aware of that fact.
    Finally, I want to emphasize that the particular transactions cited 
by the Committee, including myself, as evidence of earnings 
improprieties were transactions that either were not disclosed to the 
Board or that were, in fact, affirmatively misrepresented to us. I list 
a few of them here to illustrate the point.
2. Transactions Not Disclosed to the Board
    a. Raptor III/New Power--The Report notes that a vehicle called 
Raptor III was created by Enron management, purportedly to hedge an 
investment in New Power stock. The Report makes clear that this 
transaction was never disclosed to the Board by anyone in management, 
although it was reviewed by Andersen.
    I cannot and will not defend this transaction. It seems obvious to 
me that one cannot hedge an investment in New Power with warrants on 
the same New Power stock. It is equally obvious to me that the terms of 
this transaction, which seem to me to fail to properly value the New 
Power stock being contributed, were grossly unfair to Enron. We did not 
know that at the time, and neither company management nor Arthur 
Andersen--which was involved in valuing this transaction--told us the 
truth about it.
    This particular transaction would and should have been avoided by 
simple adherence to the controls we put into effect. The Board of 
Directors required Messrs. Causey, Buy and Skilling to determine that 
each of the LJM transactions were fair to Enron. Of equal significance, 
given the size of the transaction, this transaction plainly required 
Board approval before it could be authorized. For reasons I do not 
understand, these approval requirements were ignored in this instance.
    These approval requirements were known to Arthur Andersen. It was a 
critical part of the internal controls that they implemented at our 
direction, and that they were required to audit as Enron's internal and 
external auditors. That Andersen attended any number of subsequent 
Board and committee meetings, yet failed to raise this control failure, 
among others, with us, simply is astonishing.
    b. Raptor Recapitalization--The credit problems with the Raptor 
entities which began in late 2000 were not disclosed to the Board. The 
decision in early 2001 to recapitalize the Raptor structure with an 
$800 million forward contract on Enron stock was, likewise, concealed 
from us.
    Given its magnitude, and the critical issues it raised, this 
transaction is one that absolutely required Board approval. The 
existing risk management mechanisms also should have, but did not, 
reveal this to the Board. At each Finance Committee meeting, Mr. Buy 
presented to the Finance Committee a list of the Top 25 credit 
exposures for Enron. In February of 2001, when the Raptors were 
allegedly $350 million underwater, neither Raptor nor LJM appeared on 
the list that Mr. Buy presented to the Finance Committee, nor did he, 
Mr. Fastow, or Mr. Skilling, all of whom were in attendance at that 
meeting, raise this mat
    As has been disclosed in the press, on February 5, 2001, Arthur 
Andersen held an internal meeting in which it expressed significant 
concern about the credit capacity of the Raptor vehicles and the 
quality of the earnings being attributed to them. Just one week later, 
however, with full knowledge of the Raptor credit problems, Arthur 
Andersen assured the Audit Committee that Enron would receive a clean 
audit opinion on its financials. Andersen also told the Audit Committee 
that there were no material weaknesses in Enron's internal controls--
even though one week earlier its auditors had discussed, but not shared 
with the Board, the fact that the controls imposed by the Board for 
these related party transactions were not being followed.
    Had the Raptor restructure been presented to the Board, the Board 
might well have chosen the alternative--to shut down the Raptors--would 
have by definition avoided the accounting error related to issuance of 
new equity which accounted for the bulk of the $1.2 billion reduction 
in shareholders' equity we took in October. I find this to be 
particularly tragic.
    Andersen's failure to disclose its concerns to the Board, as with 
management's marked disregard for the required internal controls and 
lack of candor with respect to information owed to us, deprived the 
Board--us--of the ability to deal proactively with this problem. We 
cannot, I submit, be criticized for failing to address or remedy 
problems that were concealed from us.
    c. Churned Transactions--The Report notes that there was an 
observable pattern of assets being sold to LJM in one quarter, with 
earnings being booked, only to be repurchased by Enron in the following 
quarter. This, too, was concealed from the Board. As best as I can 
tell, the lists of transactions presented to the Board for their review 
did not include these ``churned'' transactions. Of equal importance, I 
cannot fathom why Messrs. Causey, Buy and Skilling would have 
authorized such activity to begin with--much less why they would have 
failed to call it to our attention. Arthur Andersen and our lawyers may 
have been aware, as well, of these transactions because they either 
audited or documented them for Enron. They said nothing to the Board 
either.
    Certainly neither I, nor any other outside director, would have 
permitted this to occur had we been aware of it.
B. The Board was Not Informed of Critical Information
    The Report makes clear that important facts about many of these 
transactions were concealed from, or affirmatively misrepresented to, 
the Board of Directors. I attribute this to a failure not of controls, 
but of character. Everyone involved in these transactions--including 
Arthur Andersen, Vinson & Elkins, Andrew Fastow, Jeff Skilling, Rick 
Buy, Rick Causey and our internal legal counsel--knew that the Board 
had imposed extensive procedures to ensure that a critical overarching 
requirement would be met: Before any transaction could be approved, it 
had to be demonstrated that the transaction was on terms that were fair 
to Enron and negotiated at arms' length. Had that single control--much 
less all of the other controls we had imposed--been adhered to, none of 
these unfair transactions could have been approved.
    As the Committee Report indicates, Andersen, in connection with the 
10Q and 10K reports, and Vinson & Elkins, in connection with the Proxy, 
were required to ensure that our disclosures were truthful, complete 
and met the SEC requirements in dealing with related parties. As the 
Report indicates, there is much evidence that they did not fulfill 
their responsibilities.
    Thus, while the Report contends that our controls were inadequate, 
it is more accurate to say they were ignored by those responsible to 
implement them. A few examples will suffice to illustrate the point.
1. Chewco
    There is no suggestion in the Report that any Board member knew 
that Chewco was, in fact, an affiliated transaction.
    Plainly, however, this fact was known to Vinson & Elkins. They 
drafted the transaction documents that created Michael Kopper's 
interest in this transaction. That interest, it is undisputed, was a 
violation of Enron's Code of Conduct. It was never presented to or 
authorized by the Board.
    Andrew Fastow and Michael Kopper both knew this violated the Code. 
It appears that this was known to other Enron employees within the 
legal department as well.
2. Rhythms
    The decision to unwind the Rhythms transaction was not disclosed to 
the Board. Our requirement that all related party transactions be 
reported to the Audit Committee therefore was violated.
    This, too, is a transaction that was grossly unfair on its face--
but, as the Special Committee report states, we simply didn't know 
about it. I am horrified that Mr. Fastow and other employees of Enron 
apparently have profited, secretly, at Enron's expense as a result of 
this transaction. I am particularly unhappy that Enron employees were 
permitted to participate in what clearly seems to be a corporate 
opportunity.
    Importantly, however, this transaction could not have occurred had 
our Code of Conduct been followed in two important respects. First, the 
Code of Conduct's requirement that transactions be on terms fair to 
Enron remained in effect as to all LJM transactions. That was 
emphasized, repeatedly, by the Board and was incorporated expressly 
into the LJM approval processes. Under no circumstances should a 
transaction this unfair ever have been authorized.
    Second, we never authorized any other employee to participate in 
any self-dealing transaction. Thus, Messrs. Kopper, Fastow, Glisan and 
others all consciously and deliberately violated the Code of Conduct in 
connection with these events. Mr. Causey, who knew the terms of the 
unwind, also failed in his obligation to report to us both the 
existence--and the unfair terms--of this transaction. Mr. Skilling, who 
was required to monitor the LJM transactions apparently failed, as 
well, in this obligation.
3. Raptor I
    The Report makes clear that this transaction was materially and 
deliberately misrepresented to the Board. Throughout the Board minutes 
and in the presentation materials, the Board was assured that the 
projected return for this transaction was 30%. In fact, as is evident 
from Deal Approval sheets signed by Ben Glisan, and Scott Sefton, 
management of the company knew that LJM's projected return was, in 
fact, a minimum of 76%. Mr. Fastow also must have known these facts, 
because they were presented to the partners of LJM2 at their annual 
meeting. Both Mr. Glisan and Mr. Fastow attended the Board meeting 
where Raptor was presented. Neither of them told us the true rate of 
return they had projected.
4. Rhythms Restatement
    It is also important, I believe, to point out that the restatement 
of $100 million in earnings from the Rhythms transaction is not the 
result of a hedge that ``didn't work.''' There has never been any 
question that--as PriceWaterhouse Coopers assured us--the transaction 
was authorized on arms' length terms that were fair to Enron. To the 
contrary, as Arthur Andersen has acknowledged, this transaction had to 
be restated solely because of an accounting error. None of us could 
have anticipated that Arthur Andersen, which was heavily involved in 
structuring this transaction, would make a technical error on a matter 
of this importance. We relied on them to ensure that this transaction 
was both permissible under the accounting rules and to be sure that it 
was structured properly, in compliance with those rules. That they 
failed in that obligation is a great disappointment to all of us.
                            iii. conclusion
    All transactions with LJM were required to be on terms that were 
fair to Enron and negotiated at arms' length. Had that requirement been 
adhered to, none of the unfair transactions criticized in the report 
could--or should--have occurred.
    What happened at Enron has been described as a systemic failure. As 
it pertains to the Board, I see it instead as a cautionary reminder of 
the limits of a Director's role. We served as directors of what was 
then the 7th largest corporation in America. This was a part-time job. 
It was necessarily limited by the nature of Enron's enterprise--which 
was worldwide in scope, employed more than 20,000 people, and engaged 
in a vast array of trading and development activities. By force of 
necessity, we could not know personally all of the employees. As we now 
know, key employees whom we thought we knew proved to disappoint us 
significantly. Although I am not a lawyer, I have found the following 
paraphrase to be an accurate description of both the scope--and the 
limitations--of a corporate director's role:
    The very magnitude of the enterprise requires directors to confine 
their control to the broad policy decisions. That we did this is clear 
from the record. At the meetings of the Board and its committees, in 
which all of us participated, these questions were considered and 
decided on the basis of summaries, reports of management and corporate 
records. These we were entitled to rely upon. Directors are also, 
entitled to rely on the honesty and integrity of their subordinates and 
advisers until something occurs to put them on suspicion that something 
is wrong.
    We did all of this, and more. Despite all that we tried to do, in 
the face of all the assurances we received, we had no cause for 
suspicion until it was too late.

    Mr. Greenwood. Thank you, Mr. Winokur. We certainly 
appreciate all of your testimony today.
    The Chair recognizes himself for 5 minutes for purposes of 
inquiry, and let me start with you, Mr. Skilling. During your 
voluntary interview with our committee staff, and then today in 
your opening statement, you repeatedly have stated that you 
believe that the related transactions in question were 
beneficial to Enron and not sham transactions.
    However, the Special Committee's report and additional 
documents make clear that these transactions were not true 
hedges. According to the minutes of the May 1, 2000, Finance 
Committee, Ben Glisan presented Raptor I and described it as 
``a risk management program to enable the company to hedge the 
profit and loss volatility of the company's investments.'' And 
if you'd like to refer to that document, it's Tab 4 in your 
notebook.
    While not mentioned in the minutes, the Finance Committee 
was also given information suggesting that the Raptor vehicle 
was not a true hedge. Notes on the three-page written 
presentation materials titled ``Project Raptor: Hedging Program 
for Enron Assets''--apparently taken by Enron's corporate 
secretary. According to the Special Committee's report--that is 
on page 106--states, ``Does not transfer economic risk, but 
transfers P&L--profit and loss--volatility.''
    Was this the primary goal and benefit of these 
transactions, Mr. Skilling?
    Mr. Skilling. It was my understanding, and I believe it was 
the understanding of the Board, that the transaction, the 
purpose of the transaction, was to provide a real hedge of 
certain high technology investments that had been extremely 
attractive for Enron over the last year and a half.
    Compensation was provided, and in return derivatives were 
written that should have protected that position. That was my 
understanding of the nature of the transaction.
    Mr. Greenwood. How would you explain, then, the corporate 
secretary at that Board meeting handwriting in, ``Does not 
transfer economic risk, but transfers profit and loss 
volatility''?
    Mr. Skilling. I think you would probably have to ask----
    Mr. Greenwood. You were there, I believe.
    Mr. Skilling. Well, there is an issue as to whether I was 
actually--the particular meeting that you're talking about was 
in Florida, Palm Beach, Florida. And on the day of the meeting 
the power had gone out at 3 in the morning, and we were 
scrambling to get it fixed. Never mind. I was incorrect. I take 
it back.
    Mr. Greenwood. So were you at this meeting, in fact, this 
Board meeting?
    Mr. Skilling. I don't know. I don't recall, but I--I don't 
recall.
    Mr. Greenwood. Okay. You have not checked records that you 
might have as to your whereabouts?
    Mr. Skilling. Well, I would have been in at least a portion 
of the meeting. Was I there for the entire meeting? I just 
don't recall.
    Mr. Greenwood. All right. Here is what we have. This is 
minutes of that meeting, May 1. Committee members present: 
Ronnie Chan, Jerome Myers, a whole long list. And it lists you 
as being there, as well as Mr. Buy, Mr. Causey, Mr. Fastow, Mr. 
Glisan, etcetera. So you were there. The meeting was supposed 
to begin at 4. It actually began at 4 minutes after 10 on May 
1. So you're not disputing that you were at this meeting.
    Mr. Skilling. I just don't recall, Mr. Chairman.
    Mr. Greenwood. Can you imagine why the minutes would 
include you as being present at the meeting if you weren't 
there?
    Mr. Skilling. Well, if I stepped out of the meeting for 
some period of time. I just don't recall.
    Mr. Greenwood. Okay. So you don't recall--it is your 
testimony under oath today that you do not recall any 
discussion at that Board meeting that would have led you or 
anyone else to believe that, in fact, this did not transfer 
economic risk, but transfers profit and loss volatility? Is 
that----
    Mr. Skilling. I do not recall any discussion at that 
meeting that would have suggested that there was no economic 
risk transfer from the transaction.
    Mr. Greenwood. Okay. In retrospect, do you believe it was a 
true hedge?
    Mr. Skilling. There is nothing I have seen that would 
suggest anything different to date.
    Mr. Greenwood. Let me go to this question, Mr. Skilling. 
The Special Committee's report is most critical of the lack of 
oversight by management of the transactions. It states that 
management had the ``primary responsibility for implementing 
the Board's controls.'' However, the Special Committee finds 
that no one was minding the store. Further, that the ``most 
fundamental management control flaw was the lack of separation 
between LJM and Enron personnel and the failure to recognize 
that the inherent conflict was persistent and unmanageable.''
    ``Fastow, as CFO, was in a position to exert great pressure 
and influence, directly or indirectly, on Enron personnel who 
were negotiating with LJM. Enron employees worked for LJM while 
still in their Enron offices, side by side with people who were 
acting on behalf of Enron.'' That is a closed quote from the 
report.
    These are pretty strong statements against the management 
of Enron, of which you were one, Mr. Skilling. How do you 
refute these allegations, or do you?
    Mr. Skilling. To the best of my knowledge, the procedures 
that were enacted by the Board should have been effective at 
managing the conflict of interest that was involved.
    Mr. Greenwood. During the committee staff interview with 
you in December 2001, just 4 months after you left Enron, 
August 14, 2001, you said that, ``The company was in the best 
shape it ever was.''
    I would like for you to explain that statement in light of 
the fact that Enron has, subsequent to your departure, declared 
bankruptcy, fired its auditor, discovered massive insider 
dealing by its CFO and other employees, fired its CFO, 
treasurer, and one of its general counsels, seen Ken Lay's 
resignation as President and CEO and as Director, laid off over 
4,500 employees, and has since reneged on its promise to pay 
them a severance, is under investigation by both Houses of 
Congress, the Department of Justice, and the SEC, had to 
restate its earnings from 1997 to 2000 in the amount of $586 
million, and had to announce an equity writedown of $1.2 
billion, not to mention likely additional earnings adjustments 
in excess of a billion dollars that indicates that Enron was 
not even profitable while you were at the helm as CEO.
    Enron's condition today seems nothing like being in good 
shape. How do you explain this?
    Mr. Skilling. All I can say is on August 14, the date that 
I left the company, I believed that the company's financial 
statements were an accurate reflection of its financial 
condition. Beyond that, there were a number of areas that we 
had made significant progress in the last 6 months. As you 
remember, there was a terrible issue related to the California 
energy crisis. By that point, prices had dropped. It looked as 
if the California energy problem had been contained and 
resolved.
    Second of all, the broadband business. As we all know, in 
the first quarter of 2001, the stock and equity prices for 
broadband companies were under enormous pressure. We had 
restructured that business, two separate restructuring 
activities, the first in late March of 2001, the second in late 
June of 2001, and we believed that we had significantly reduced 
any exposure, further exposure from the broadband business to 
the rest of Enron's activities.
    And third, and probably most important in my mind, we had 
completed the best quarter we had ever had, the second quarter 
of 2001, in our wholesale merchant business. The growth rates 
had remained at levels that, quite frankly, were extremely 
high, and the profitability from the business was extremely 
good. So on August 14, again, I believe the financial 
statements were an accurate reflection of the state of the 
company, and I believed that we had made progress on a number 
of different dimensions that put the company in a good position 
for the future.
    Mr. Greenwood. Mr. Skilling, a massive earthquake struck 
Enron right after your departure. And people in far inferior 
positions to you could see cracks in the walls, feel the 
tremors, feel the windows rattling, and you want us to believe 
that you sat there in your office and had no clue that this 
place was about to collapse.
    Mr. Skilling. On the day I left, on August 14, 2001, I 
believed the company was in strong financial condition.
    Mr. Greenwood. My time has expired. The Chair recognizes 
the gentleman from Michigan, Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Skilling, The New York Times this morning described you 
as, and I am going to quote, ``the ultimate control freak, a 
sort of hands-on corporate leader, who kept his fingers in all 
pieces of the puzzle.'' And The Times isn't the first 
publication to describe you this way. Do you really want us to 
believe and the American people to believe that a control freak 
was ignoring the very transactions that were providing 70 
percent of the company's revenues in 2001?
    Mr. Skilling. First, with all due respect, the 70 percent, 
I don't know where that comes from, and we would have to spend 
some time discussing that. But in terms of the assertion by The 
New York Times that I was a control freak, I think probably a 
more accurate description would be that I was a controls freak. 
We had a company that was an enormous organization that was far 
flung across the globe.
    We had to put in place the ability for our managers across 
the world to make decisions on a timely basis. To do that, we 
put in force what I believe was a very effective control 
structure for the company. And if you would like I could go 
into some of the elements of that control structure.
    Mr. Stupak. No, because the earlier panel--one of the 
witnesses there described you as being intense hands-on, not a 
control freak but an intense hands-on, that you really knew 
every part of this operation. From 1997, you were Chief 
Operating Officer until you became the CEO. So you are either 
one or two in the company for the last 4 years. And from what I 
have heard from your testimony today, you don't know what went 
on. Everything was fine when you left.
    Mr. Skilling. Congressman, Enron Corporation was an 
enormous corporation. Could I have known everything going on 
everywhere in the company? I had to rely on the best people. We 
hired the best people. We had excellent, excellent outside 
accountants and law firms that worked with us to ensure----
    Mr. Stupak. With all due respect, Mr. Skilling, you 
couldn't even answer the Chairman's question about a Board 
meeting. You know, the Board meetings, that was May 1 the one 
he asked you about. Every Board meeting, when you leave the 
room, anyone leaves the room, it is all marked in there--left 
the room for a short period of time. So the transaction that 
the Chairman was asking you about you certainly were there. You 
certainly were there.
    Mr. Skilling. Well, first of all----
    Mr. Stupak. But let me just ask you a couple of other 
questions, then.
    Mr. Skilling. Sure.
    Mr. Stupak. You were COO when LJM1 was initiated, were you 
not?
    Mr. Skilling. Yes.
    Mr. Stupak. And you were also the COO when LJM2 was 
created, were you not?
    Mr. Skilling. Yes, that is correct.
    Mr. Stupak. And you were also the COO when JEDI was 
created, were you not?
    Mr. Skilling. I was not. I believe at that time I was 
Chairman and Chief Executive Officer of Enron Capital and 
Trade, which was our wholesale merchant business.
    Mr. Stupak. Okay. Well, you were the COO, then, when Chewco 
was set up.
    Mr. Skilling. I don't believe so. I believe I was still 
Chairman and Chief Executive Officer.
    Mr. Stupak. Well, that was later in 1997. When in 1997 did 
you become COO?
    Mr. Skilling. It was January--I believe January 1997.
    Mr. Stupak. Okay.
    Mr. Skilling. I think that's correct.
    Mr. Stupak. Well, the side agreement between Chewco and 
JEDI was--I believe testimony earlier today was December 1997, 
so you would be COO then.
    Mr. Skilling. Then I would have been, yes.
    Mr. Stupak. Okay. Now, in looking at all of this, and in 
looking at your code of ethics, it says--it is on page 49, 
investments and outside business interests of officers and 
employees. And you asked from every person complete loyalty to 
the best interests of the company and a maximum application of 
skill, talent, education, to the discharge of the job 
responsibilities without any reservation whatsoever.
    ``Therefore, it follows that no full-time officer or 
employee should''--I will go to B--``make investments or 
perform services for his or her own related interests in any 
enterprise under any circumstances for the reason or nature of 
the business conducted by such enterprise. There is, or could 
be, a disparity or conflict of interest between the officer and 
the employee and the company.'' True statement, right, that 
code of ethics there?
    Mr. Skilling. I assume that is our code of ethics.
    Mr. Stupak. Okay. Then why did you then waive that code of 
ethics for Mr. Fastow, not once but twice, to create these 
companies, these SPEs?
    Mr. Skilling. You are asking a somewhat different question. 
You were asking about Chewco. Is it Chewco that you are 
interested in, or are you interested in----
    Mr. Stupak. No, no. No, I am asking about--you were there 
when all of these--you were the COO when all of these were 
created.
    Mr. Skilling. Yes.
    Mr. Stupak. Especially the side agreement, which is the 
real problem between Chewco and JEDI. So they sell an asset, 
the next day they sell it back, real roundabout way to make a 
lot of money here for some people.
    Mr. Skilling. Sir, I don't believe there were any 
transactions subsequent with Chewco. To my knowledge, there 
were no transactions with Enron subsequent to the Chewco 
purchase of JEDI.
    Mr. Stupak. There was a conflict on June 28, 1999. I am 
referring to the Board meetings. I believe it is number 7 in 
your book. And if you look on page 2 and page 3, page 3 in 
particular, ``Resolved, therefore, the Board hereby adopts and 
ratifies the determination by the Office of the Chairman, 
pursuant to the company's conduct of business affairs, 
investments, and outside business interests of officers''--the 
thing I just read to you--``and, therefore, that participation 
of Andrew S. Fastow as the managing party, manager of the 
partnership, will not adversely affect the interests of this 
company.''
    You and the Board did it on June 28, 1999. You did it again 
for Mr. Fastow again on October 11 and 12, 1999. And on October 
11, 1999, it is found on page 18 of your Board meetings. Is 
this part of your creative corporation that you----
    Mr. Skilling. Sir, I think we are going to need to go back. 
If we want to answer this accurately, we are going to need to 
go back specifically--at specific separate transactions. The 
Chewco transaction, there was no waiver.
    Mr. Stupak. Oh, wait a minute. Wait.
    Mr. Skilling. To my knowledge, there was no waiver of the 
code of conduct for the Chewco transaction. On LJM1, there was 
a waiver of the code of conduct that was based on a fairness 
opinion that we had from an accounting firm that the 
transaction was in the interest of Enron shareholders. On LJM2, 
we recognized that there was a potential creation of conflict 
of interest. To mitigate or eliminate that conflict of 
interest, we established some very tight controls to ensure 
that Enron's interests would be protected.
    At no time did I enter into any transaction or was I 
personally involved in any transaction that I believed was not 
fully in the interest of Enron shareholders.
    Mr. Stupak. And the controls didn't work, and those 
controls were--that were there in your code of ethics, you 
waived them.
    Mr. Skilling. The code of ethics does not have a 
description of codes or specific procedures to be followed. The 
code of ethics is a code of ethics that was waived in lieu of 
establishing a range of very sophisticated procedures to 
eliminate the conflict of interest so that Enron could benefit 
from the creation of these----
    Mr. Stupak. And they never did.
    Mr. Greenwood. The time of the gentleman----
    Mr. Stupak. They never did benefit.
    Mr. Greenwood. [continuing] from Michigan has expired.
    The Chair recognizes the gentleman from Louisiana, Mr. 
Tauzin, for 5 minutes.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Winokur, in your testimony you say that the report 
makes it clear that those in management in whom you relied to 
tell us the truth did not do so. Was Mr. Skilling one of those 
people?
    Mr. Skilling. Sir, I missed it. Is that directed at----
    Chairman Tauzin. I have asked Mr. Winokur the question.
    Mr. Winokur. I think it is for me.
    Mr. Skilling. That is what I thought. I just missed----
    Mr. Winokur. Congressman, I believe the report says that we 
have conflicting information about the Raptor transaction.
    Chairman Tauzin. Please answer the question. You said that 
people in management did not tell you the truth. Was Mr. 
Skilling one of those people?
    Mr. Winokur. I don't believe that Mr. Skilling ever lied to 
us. No, sir.
    Chairman Tauzin. Did he tell you the whole truth?
    Mr. Winokur. I believe that management, including a large 
number of people, did not disclose items we were entitled to 
receive.
    Chairman Tauzin. Well, let us look at the secrets that were 
kept from the Board according to you, Mr. Jaedicke. One of the 
seven deadly secrets you mentioned in your testimony at page 
10, and I will go through four of them. The first is that the 
Board didn't know that Mr. Kopper was involved in LJM. Is that 
correct, Mr. Jaedicke?
    Mr. Jaedicke. We did not know he was involved in LJM. That 
is correct.
    Chairman Tauzin. Right. Let us turn to you, Mr. Skilling. 
Did you know that Mr. Kopper was involved with LJM?
    Mr. Skilling. Yes, I did.
    Chairman Tauzin. Did you tell the Board?
    Mr. Skilling. I don't recall.
    Chairman Tauzin. Let us look at the second deadly secret. 
The Board was not informed and did not approve of any other 
Enron employees besides Mr. Fastow working for or having 
financial interest in LJM. Mr. Skilling, did you know that 
other employees besides Mr. Fastow had interest or investments 
in LJM deals?
    Mr. Skilling. I did not.
    Chairman Tauzin. You did not know that. Who knew that?
    Mr. Skilling. Certainly, whoever had the records for 
financial disbursements by LJM, which I assume would be the 
partnership records, would know.
    Chairman Tauzin. You didn't see the approval sheets that 
were sent to you by Mr. Mintz on these deals?
    Mr. Skilling. I am sorry. What----
    Chairman Tauzin. He sent them to you in May according to 
his testimony. He sent you approval sheets on all of these 
deals, and these deals outline who was negotiating for and 
against the corporation. And they indicated in one case that 
Kopper was negotiating for LJM, and Mr. Yaeger was negotiating 
for the corporation. You have seen all of these sheets?
    Mr. Skilling. Can you give me a specific reference, Mr. 
Chairman, that I can look at?
    Chairman Tauzin. It is Tab 26.
    Mr. Skilling. Tab 26.
    Chairman Tauzin. You were not aware that Messrs. Glisan, 
Morantz, Yaeger, and others had investments in deals that were 
being done by LJM?
    Mr. Skilling. I had no knowledge that Messrs. Glisan, 
Morantz, Yaeger, or Linn had interest in LJM.
    Chairman Tauzin. So Mr. Fastow never told you this?
    Mr. Skilling. He never told me that.
    Chairman Tauzin. And, therefore, you never communicated to 
the Board that other members of the corporation were engaged in 
investments in these corporations?
    Mr. Skilling. Mr. Chairman, I didn't know.
    Chairman Tauzin. But you had your hands in everything. But 
you didn't know this.
    Mr. Skilling. Have I said I had my hands in everything? I 
think----
    Chairman Tauzin. Well, people have said you did.
    Mr. Skilling. [continuing] my comment was that this is a 
very large corporation. We are a multinational corporation--
operation spread around the world. It would be impossible----
    Chairman Tauzin. One of the seven deadly secrets apparently 
that was kept from you, according to you, Mr. Jaedicke, was the 
secret that the Board had sold--turned around and sold, rather, 
assets right before the financial reporting period only to buy 
five of them back immediately after the reporting period.
    Mr. Skilling, were you aware of that fact?
    Mr. Skilling. I was not aware of that fact.
    Chairman Tauzin. You didn't know that the company was 
selling assets and repurchasing them after the financial 
reporting period?
    Mr. Skilling. There is only one asset that I was aware of 
that was sold and repurchased, and that was an interest in LJM1 
in a project in Brazil, a power project in Brazil, that was 
called Queba.
    Chairman Tauzin. And, finally, fourth deadly secret. That 
the Board was not told that Enron agreed to protect LJM from 
losses on any of its transactions. Mr. Skilling, you deny 
knowing that at all?
    Mr. Skilling. I absolutely unequivocally deny that there 
was any arrangement, any agreement, period, that would have 
provided a riskless rate of return to anyone that we dealt with 
as Enron Corporation.
    Chairman Tauzin. Well, Mr. Jaedicke, you're telling me that 
that is true and that you were never told of it. Is that 
correct?
    Mr. Jaedicke. Well, sir, I was quoting the findings of the 
Special Committee here and saying we did not know--we did not 
have available to us that information.
    Chairman Tauzin. Let me quote you, then. On page 9 of your 
testimony you say that one of the 13 controls that you put in--
--
    Mr. Jaedicke. Right.
    Chairman Tauzin. [continuing] to make sure that there 
weren't any conflicts of interest, and that the special 
transactions would be reviewed correctly--look at number 4. It 
says, ``Not only that Buy and Causey would approve all of these 
transactions, but that Jeff Skilling, President and Chief 
Operating Officer, and Mr. Fastow's superior, also was to 
review and approve any transactions.'' Is that correct?
    Mr. Jaedicke. That is correct, sir.
    Chairman Tauzin. Were you aware that Mr. Skilling was 
refusing to sign the approval forms?
    Mr. Jaedicke. No, sir, I was not.
    Chairman Tauzin. You were never told that he refused to 
sign the forms.
    Mr. Jaedicke. No, sir, I was not.
    Chairman Tauzin. You also have a control number 6, that 
once a year the Audit Committee, which I believe you chaired, 
is that correct?
    Mr. Jaedicke. Right, sir.
    Chairman Tauzin. Was to review the transactions that had 
been completed in the prior year. Did the Audit Committee do 
that?
    Mr. Jaedicke. Yes, they did, sir.
    Chairman Tauzin. Did you ever see these approval forms at 
all?
    Mr. Jaedicke. Not the approval forms.
    Chairman Tauzin. Let me read to you the bottom of the one I 
am referring to. It is the one that has to do with the Cortez--
the deal name is Cortez. It is a deal negotiated by Michael 
Kopper for LJM and negotiated by Yaeger on behalf of the 
corporation. I am sorry, by Tustar Patel.
    And in this deal the last statement is, ``Has the Audit 
Committee of Enron Board of Directors reviewed all Enron LJM 
transactions within the past 12 months?'' And the answer on the 
form is no. Is that correct?
    Mr. Jaedicke. Sir, I don't have the form.
    Chairman Tauzin. I am asking to look at that tab. I think 
it is number 26.
    Mr. Winokur. Sir, it is the back part of the tab, the----
    Chairman Tauzin. It is multiple pages. But if you will look 
at page number 2 on the approval sheet, item number 3F, you 
will see the question. Has the Audit Committee of Enron 
Corporation Board of Directors reviewed all Enron LJM 
transactions within the past 12 months? And the answer checked 
off is no.
    The next question, ``Have all recommendations of the Audit 
Committee related to Enron LJM transactions been taken into 
account in this transaction?'' And the box is marked no, with 
the further explanation that the Audit Committee has not 
reviewed any transactions to date. Is that accurate?
    Now, everybody signed off on this. If you look at the next 
page, you will see where the business unit, business unit 
legal, Enron Corporation legal, Global Finance legal, Mr. Buy, 
Mr. Causey, all signed off on it as being accurate. The only 
person who apparently didn't sign it was Mr. Skilling. Was this 
accurate or not?
    Mr. Jaedicke. Our first review of the LJM transactions 
would have been--which we did once a year, would have been in 
February of 2000. And I am just--I don't know what the--the 
date is what is hanging me up here. I have not seen this 
information.
    Chairman Tauzin. Well, let me ask Mr. Skilling. Did you 
personally follow the control number 4, which required you to 
review and approve every single one of these transactions?
    Mr. Skilling. I think there are a number of points I would 
like to make, and I hope----
    Chairman Tauzin. Could you just answer that first? Did you, 
in fact, review and approve all of these transactions as 
required by control number 4?
    Mr. Skilling. Did I meet my responsibilities as Chief 
Operating Officer----
    Chairman Tauzin. Just answer that question. Did you review 
and approve all of the transactions as required by number 4 of 
the controls?
    Mr. Skilling. I was not required to approve those 
transactions.
    Chairman Tauzin. So you disagree with the control 
provision?
    Mr. Skilling. I take it as very----
    Chairman Tauzin. Mr. Jaedicke's testimony----
    Mr. Skilling. Sir, if you would go back to the October 1999 
minutes of the Board of Directors meeting when the original 
control system was set up, it is absolutely explicit and 
absolutely clear that approval was to be made by Mr. Rick Buy 
and Mr. Causey, and it was going to be reviewed by the Audit 
Committee.
    Chairman Tauzin. So, Mr. Jaedicke, let me go to your 
testimony. Look on page 9. Mr. Jaedicke, you tell us here in 
writing that Jeff Skilling, President/Chief Operating Officer, 
and Mr. Fastow's superior, also was to review and approve any 
transactions. He is telling me that is wrong. Who is correct?
    Mr. Jaedicke. Mr. Chairman, in the Audit Committee meeting 
of--and the Finance Committee meeting, too, I think, of 
February 2001, the controls are enumerated. And I believe it 
says the controls that had been in place--these were covering 
the LJM transactions--required the approval of Mr. Skilling, 
Mr. Buy, and Mr. Causey.
    Chairman Tauzin. In fact, I am reading it right now. It is 
on page 2 of the minutes of October 6, and let me quote it. It 
says that he then discussed the mechanisms that had been put in 
place to mitigate any potential conflicts, including, one, his 
fiduciary responsibilities to the companies, to the Office of 
the Chairman of the Board, could ask him to resign from LJM at 
any time apparently.
    Number 3, Messrs. Buy, Causey, and Skilling approved all 
transactions between the company and LJM funds. Mr. Skilling, 
do you deny the existence of these Board meetings?
    Mr. Skilling. Can you give me the specific reference, Mr. 
Chairman?
    Chairman Tauzin. The reference is on page 2 of the minutes 
of the meeting of the Finance Committee of the Board of 
Directors of Enron Corporation, October 6, 2000.
    Mr. Skilling. Which tab? Do you know which tab?
    Chairman Tauzin. It is Tab 18.
    Mr. Skilling. Tab 18.
    Chairman Tauzin. I am sorry, 8. Tab 8.
    Mr. Skilling. Tab 8. I would refer you back earlier into 
the paragraph on page 2 of those minutes. In that paragraph it 
says, ``Mr. Fastow then discussed the company's private equity 
strategy.'' Mr. Fastow is the person that represented what 
controls had been in place inside the company to review LJM 
transactions. This is a verbatim report of what Mr. Fastow said 
to the Finance Committee----
    Chairman Tauzin. Let me read you the next sentence, Mr. 
Skilling. It says, ``Messrs. Causey and Skilling then discussed 
the benefits of the company.'' You were at that meeting, 
weren't you?
    Mr. Skilling. Mr. Causey and Mr.----
    Chairman Tauzin. The lights weren't out. The power wasn't 
out. You were at the meeting. You heard Mr. Fastow say that you 
were going to approve each one of these transactions. Did you 
say, ``I am not going to do that''?
    Mr. Skilling. I got a little confused. I mean, we are all 
under a tremendous amount of tension and a tremendous amount of 
pressure with what is going on here. And I will admit to being 
under a tremendous amount of pressure and an intense amount 
of----
    Chairman Tauzin. I grant you that, Mr. Skilling. I would 
just like a clear answer. Were you at that meeting?
    Mr. Skilling. This meeting was the meeting that occurred in 
Palm Beach, Florida. This is October 6, 2000. In that meeting, 
the power had gone out, and as everybody remembers we were in a 
room--the room was dark, quite frankly, and people were walking 
in and out of the meeting trying to----
    Chairman Tauzin. You never heard Mr. Fastow say that you 
would approve all of these transactions?
    Mr. Skilling. I don't recall.
    Chairman Tauzin. You just don't recall.
    Mr. Skilling. I do not recall.
    Chairman Tauzin. But you never ever said to the Board or 
the committee, ``I am not going to do that. I am not going to 
approve these transactions''?
    Mr. Skilling. I wouldn't have to. In October 1999, when the 
process was established for approval of transactions with LJM, 
the process is absolutely crystal clear. It involved approval 
by Mr. Causey and Mr. Buy.
    Chairman Tauzin. Is that why you wouldn't sign these 
documents?
    Mr. Skilling. No, and I----
    Chairman Tauzin. Why didn't you sign them? Tell me that, 
please.
    Mr. Skilling. May I give you--you will give me time to 
answer?
    Chairman Tauzin. You have got it.
    Mr. Skilling. Okay.
    Chairman Tauzin. Please do.
    Mr. Skilling. Okay. Thank you, sir. First, I did not 
receive that memo. Second of all, I----
    Chairman Tauzin. Wait. Are you saying you did not receive 
Mr. Mintz's memo?
    Mr. Skilling. To my recollection, I did not receive that 
memo. Second, I would have had no problem signing that, and I 
believe if you look at the specifics of the memo of Mr. 
Mintz's--in fact, do you have the reference for Mr. Mintz's 
memo in here? Do you have a copy of that memo?
    Chairman Tauzin. We have a copy of the memo. We also have 
his testimony right before you got here. It said he tried three 
times to ask you for a meeting to talk about the memo. Do you 
recall that?
    Mr. Skilling. I do not recall that. Would you mind if we 
turn to that memo?
    Chairman Tauzin. Sure.
    Mr. Skilling. Which----
    Chairman Tauzin. Tab 15.
    Mr. Skilling. Number 13?
    Chairman Tauzin. 13, I am sorry. Tab 13. It is 15, I am 
sorry.
    Mr. Skilling. 15. I draw your attention to a couple of 
points in this memo----
    Chairman Tauzin. Please do.
    Mr. Skilling. --Mr. Chairman. The first one is it says, 
``Accounting and RAC require the signatures of Rick Causey and 
Rick Buy. Such approval sheet also provides for your 
signature.'' In the next paragraph it says, ``All required 
signoffs for the 2000 transactions have recently been 
completed.'' All signoffs have recently been completed.
    And then further in that same paragraph it says, ``In our 
discussions arranging for your signature,'' which, as it said, 
the form provides for my signature, ``it says that we have--it 
was decided to provide you with all finalized approvals in 
aggregate rather than on a piecemeal fashion, and we are now 
ready to do so,'' which meant----
    Chairman Tauzin. In other words, everybody else had signed, 
they were ready to get your signature----
    Mr. Skilling. The transactions were done. The transactions 
had been completed.
    Chairman Tauzin. Of course. I am not arguing that. I am 
just asking you----
    Mr. Skilling. Transactions could not have been completed. 
Jordan Mintz is a lawyer for Enron Corporation. Those 
transactions could not have been completed if it was necessary 
for me to authorize those transactions. It couldn't have been 
done.
    Chairman Tauzin. I am not asking whether you authorized 
them. I am asking whether you signed the approval sheets, 
because there is an issue here, Mr. Skilling, whether or not 
under the controls set up by the Board, as they understood 
them, you were required to do so, to review and approve. And 
you are telling us, No. 1, you never got the Mintz memo; No. 2, 
you don't recall anybody asking you to set up a meeting to 
discuss signing these documents; and, No. 3, I am still asking 
you, why didn't you sign them at all?
    Mr. Skilling. They were not given to me.
    Chairman Tauzin. You never saw them?
    Mr. Skilling. I do not recall being presented with these 
documents. I do not recall being presented with these 
documents.
    Chairman Tauzin. I have exceeded my time. Thank you, Mr. 
Chairman.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the gentlelady from Colorado, Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Skilling, you knew certainly in 2000, and probably 
sooner, that these LJM transactions in particular--there were 
risks of a conflict of interest with Mr. Fastow, did you not?
    Mr. Jaedicke. Are you----
    Ms. DeGette. Because Mr. Fastow----
    Mr. Jaedicke. [continuing] addressing that to Mr. Skilling, 
or to me?
    Ms. DeGette. Mr. Skilling.
    Mr. Skilling. Are you asking if I knew that there was a 
conflict of interest associated with LJM?
    Ms. DeGette. There was a potential conflict of interest.
    Mr. Skilling. Absolutely. That is why----
    Ms. DeGette. Absolutely.
    Mr. Skilling. [continuing] we put the procedures in place 
to eliminate those conflicts.
    Ms. DeGette. And that is why, as you said, you were a 
controls freak, to make sure the controls were in place, right?
    Mr. Skilling. We would not have entered into the LJM 
transaction----
    Ms. DeGette. Yes or no.
    Mr. Skilling. [continuing] without an adequate control----
    Ms. DeGette. You wanted control, right? Yes or no.
    Mr. Skilling. We would not have entered into the 
transactions if we had not had adequate controls to manage the 
conflict of interest.
    Ms. DeGette. Okay. Now, you said that October 6, 2000, you 
don't recall being there for this discussion about--by Mr. 
Fastow about the LJM funds because the lights were out?
    Mr. Skilling. I do not recall.
    Ms. DeGette. Okay. So you don't recall him talking about 
how his role in the LJM funds could potentially create a 
conflict of interest in that he negotiates for the LJM funds?
    Mr. Skilling. We were all----
    Ms. DeGette. Did you know he negotiated for the LJM funds?
    Mr. Skilling. Actually, I believe Andy had represented to 
the Board--my recollection is Andy had represented to the Board 
that he would not be involved in direct negotiations of LJM 
transactions.
    Ms. DeGette. So as the captain of this ship, which was 
Enron, you don't recall being at a meeting in Palm Springs, 
Florida, where Mr. Fastow said his role in the LJM funds could 
potentially create a conflict of interest in that he negotiates 
for the LJM funds?
    Mr. Skilling. There was no question in anyone's mind on the 
Board of Directors or in management that there was not a 
conflict of interest created. The objective was to create a 
process----
    Ms. DeGette. No. But you don't recall him ever saying to 
you or anyone that he negotiated for the LJM funds?
    Mr. Skilling. Actually, it is my recollection that Andy had 
represented that he would not negotiate for the LJM funds.
    Ms. DeGette. Okay. So did you, in your role, ever review 
the minutes of the Finance Committee?
    Mr. Skilling. I did not review them.
    Ms. DeGette. You did not review the minutes.
    Mr. Skilling. No.
    Ms. DeGette. So what you are saying is if someone wrote 
this in here--it is in Exhibit 8--that would be a lie?
    Mr. Skilling. No. If that was an accurate representation of 
what Andy described to the Finance Committee, that is what is 
in the Board minutes.
    Ms. DeGette. And that was the meeting you don't recall if 
you were there.
    Mr. Skilling. I was in the meeting. I don't recall if I was 
there at the time Mr. Fastow specifically went through the 
steps for control.
    Ms. DeGette. Do you recall an agreement that you would 
approve all transactions between the company and the LJM funds?
    Mr. Skilling. No, I do not recall that.
    Ms. DeGette. Did you think you had to approve all 
transactions?
    Mr. Skilling. I did not. That was not my understanding.
    Ms. DeGette. You did not think you had to approve the 
transactions between the company and the LJM funds?
    Mr. Skilling. No. We had----
    Ms. DeGette. Okay.
    Mr. Skilling. [continuing] a process in place where Mr. 
Causey and Mr. Buy, who each had organizational units of 
several hundred people, probably in aggregate several thousand 
controls people--we had Arthur Andersen----
    Ms. DeGette. Okay. Did you----
    Mr. Skilling. [continuing] reviewing the transactions, and 
we had Vinson & Elkins reviewing the transactions.
    Ms. DeGette. Okay. Did you ever hear about a thing called a 
deal approval sheet, which was one of the controls that the 
Board put into place?
    Mr. Skilling. Absolutely. I am familiar with the deal 
approval process.
    Ms. DeGette. And you knew those deal approval sheets were 
supposed to be signed off on by a variety of people when there 
was one of these transactions, correct?
    Mr. Skilling. That is incorrect. The deal approval process 
was the standard capital approval process. Any time Enron was 
disbursing cash, any time Enron was disbursing cash of a 
certain level of magnitude----
    Ms. DeGette. Right.
    Mr. Skilling. [continuing] there had to be a dash 
generated.
    Ms. DeGette. Right.
    Mr. Skilling. And that dash had different authority levels 
within the company.
    Ms. DeGette. Right.
    Mr. Skilling. So there were some people----
    Ms. DeGette. And some of the authorities required your 
approval, didn't they?
    Mr. Skilling. For capital----
    Ms. DeGette. Some of the financial levels.
    Mr. Skilling. [continuing] expenditure--for a capital 
expenditure where cash was leaving Enron Corporation, there 
were different levels of authority within the company. Business 
unit managers had a level of authority. I, as Chief Operating 
Officer, had a level of authority. As CEO, I had a level of 
authority.
    Ms. DeGette. Did you thin----
    Mr. Skilling. Mr. Sutton, as Vice Chairman, had a level of 
authority. Mr. Lay----
    Ms. DeGette. Did you----
    Mr. Skilling. [continuing] as CEO had a level.
    Ms. DeGette. Okay. I got you. Did you ever think that you 
had to sign the dash sheet for any of the LJM transactions?
    Mr. Skilling. Any LJM transaction that involved a cash 
disbursement that would have been within my signing authority 
either had to be signed by me or someone else higher in the 
hierarchical chain of the company.
    Ms. DeGette. Do you recall ever seeing a dash sheet for any 
LJM transaction?
    Mr. Skilling. I don't recall.
    Ms. DeGette. Do you recall ever signing one?
    Mr. Skilling. I don't recall.
    Ms. DeGette. Do you recall ever seeing one and then not 
signing it?
    Mr. Skilling. There would never be a case on a dash where I 
would have been required to sign a dash, that if someone higher 
in the authority chain had not signed it that I would have to 
sign, because we wouldn't have disbursed cash.
    Ms. DeGette. Okay. With respect to the LJM transactions, 
where is the written policy that says either you or someone 
superior to you has to sign these dash sheets?
    Mr. Skilling. The cash sheets are a totally separate issue 
from the LJM transactions. The LJM transactions--any 
transaction with LJM2 was governed, in addition by the--to the 
dash process----
    Ms. DeGette. But there were special dash sheets for LJM, 
right?
    Mr. Skilling. Not initially. I think that there was a 
supplementary sheet that was developed later.
    Ms. DeGette. Well----
    Mr. Skilling. From the original--the original approval of 
LJM2, which is where the transactions occurred, please go back 
to the Board of Directors meetings and the Finance Committee 
meetings of October 1999. The process is very clearly 
established in light of that.
    Ms. DeGette. So you remember 1999; 2000 you're not so sure.
    Mr. Skilling. That was the time that the process was set 
up.
    Ms. DeGette. And the lights were out and stuff like that. I 
understand.
    Mr. Skilling. That was in the year 2000, not in 1999.
    Ms. DeGette. Now, please take a look at--right, the lights 
were out in 2000.
    Mr. Skilling. 2000, not in 1999.
    Ms. DeGette. But everything was okay in 1999. I think that 
is kind of prophetic, Mr. Chairman.
    Exhibit 13--I want you to just take a quick look at that. 
We talked about that before. The Chairman talked about this. It 
is a memo from Jordan Mintz to Rick Buy and Rick Causey about 
the LJM approval process transaction substantiation. And on 
page 2, it says, ``The company subsequently adopted a written 
LJM approval sheet,'' and it says, ``Such approvals are to be 
reviewed and executed by certain members of Enron senior 
management, including Jeff Skilling.'' Do you see that? And it 
doesn't say, ``Jeff Skilling or someone else'' does it?
    Mr. Skilling. It says ``reviewed,'' and it says, for 
example, ``the checklist provides.'' In the memo that Jordan 
wrote, which was clearly not contemporaneous with approval of 
LJM transactions, they were basically saying they were putting 
these together, bundling them up. It was not necessary for 
approval of the transaction for me to sign, but they had a 
provision for me to sign.
    I don't recall receiving that memo. Had I received that 
memo, what I would have done is looked at the specific 
transactions. If Rick Buy and Rick Causey had signed those 
transactions, and I looked at the transactions and they looked 
reasonable, I would have had no trouble signing for those 
transactions.
    Mr. Greenwood. The time of the gentlelady from Colorado has 
expired. The Chair recognizes the gentleman from Florida, Mr. 
Stearns.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Skilling, just sort of as an oversight, I think that 
your strategy at Enron has been basically to build an asset 
light strategy. Hasn't that been true? I mean, I have seen that 
in Business Week and other literature, that you have always 
said that you believed it should be asset light is your 
strategy for business.
    Mr. Skilling. We were trying to do as much profitable 
business per unit of assets as we could.
    Mr. Stearns. So just as a commentary, then, the fact that 
this went into bankruptcy and failed to provide liquidity was 
really a failure of your strategy for this company, I mean, 
just in a man-to-man talk here, that you are going around 
telling all of the literature and all of these magazines that 
it is asset light, and you just didn't have liquidity, and this 
company failed in a large part because of you. I mean, you are 
not trying to say this morning--this afternoon that you are 
here saying this company was just flying along 100 percent in 
good shape, and then you left and things fell apart just 
because you left?
    Mr. Skilling. Congressman, I think--and we have all read 
business history--there are things called runs on banks, and 
you can have----
    Mr. Stearns. Things called what?
    Mr. Skilling. Things called run on the bank. You can have a 
fundamentally solvent company that is profitable that has an 
illiquidity problem. That's my interpretation of what occurred.
    Mr. Stearns. No, I understand that. But it is just awfully 
hard to believe after looking at all of these partnerships, and 
how they were financed, and Fastow taking money out when nobody 
on the Board of Directors knew about it, and this fellow 
reported to you. And I understand he was your protege.
    And so here we have all of these partnerships, and you are 
saying--you are saying today basically you did not know any of 
the financial structure of LJM. Isn't that what you are saying 
today?
    Mr. Skilling. I said that we knew that a----
    Mr. Stearns. I mean, you. You. I mean----
    Mr. Skilling. Me, as a member of the Board of----
    Mr. Stearns. Yes, you are saying you didn't know anything--
--
    Mr. Skilling. [continuing] Directors and a member of 
management of Enron Corporation, knew that a private equity 
fund was being established, and that one of our executives, 
Andrew Fastow, would have a role, an economic interest in that 
entity. We did know that, yes.
    Mr. Stearns. So Mr. Fastow reported to you. Did you ever 
talk to Jeffrey McMahon?
    Mr. Skilling. Yes.
    Mr. Stearns. Okay. Was he in your office regularly, or did 
you talk to him infrequently?
    Mr. Skilling. Pretty infrequently.
    Mr. Stearns. Pretty infrequently. Now, as I understand, his 
title was basically he was President and Chief Operating 
Officer of Enron. And you just didn't talk to him very much.
    Mr. Skilling. I am sorry. Say again?
    Mr. Stearns. It says here that he was President and Chief 
Operating Officer of Enron.
    Mr. Skilling. I think that happened last week.
    Mr. Stearns. Okay. Okay. Yes. But you are saying you talked 
to him infrequently, then.
    Mr. Skilling. I would guess probably Jeff and I would talk 
once a month.
    Mr. Stearns. We have got a calendar of his which shows that 
he met with you on March 16 at 11:30 a.m. Now, this is Tab 
Number 10. You might want to just take a look at that. And, you 
know, one of the reasons he was meeting with you, because he 
had some concerns about the LJM partnerships.
    And we have Tab Number 9, which is before that--you are 
welcome to look at--talks about his concern and basically 
conflicts of interest, talking about the financing structure. 
Do you remember talking to him about this on March 16?
    Mr. Skilling. Yes, I do.
    Mr. Stearns. Okay. Well, that is good. We have established 
that Mr. McMahon's schedule is correct. He had you down for an 
11:30 appointment. We have his notes before he met with you, 
which you can look at at Tab 9. We have his schedule. So he did 
meet with you.
    So my question is to you, did he talk to you about LJM and 
the financing structure or any of the partnerships?
    Mr. Skilling. My recollection of the meeting is Jeff came 
in and had some concerns about his compensation related to LJM.
    Mr. Stearns. He never talked about any conflict of interest 
in any of these partnerships? He never mentioned anything like 
that to you?
    Mr. Skilling. What his concern was as far as compensation 
was concerned is Jeff felt that he was being put in an awkward 
position in having to negotiate with Andy, and that that 
might--this is my recollection. That it might impact his 
compensation package.
    Mr. Stearns. He never mentioned to you that, ``I am 
concerned what is the best interest of the shareholders here''?
    Mr. Skilling. I don't recall that. I recall this being an 
issue of compensation.
    Mr. Stearns. Well, you know, if you look at his schedule, 
he went out and talked to--on the 31st of March he met with 
Fastow, and we have had a case on April 6 he had an 
appointment, and basically his job changed. Did you know about 
that?
    Mr. Skilling. Yes.
    Mr. Stearns. And why did his job change?
    Mr. Skilling. At the time we were setting up a new business 
that was related to some internet activities that we developed 
at the company, and we were looking for someone to be a senior 
executive in that business. And that search had been under the 
discussions, and that search had been underway for quite some 
time.
    Mr. Stearns. My time has expired, but I have a hard time 
believing, Mr. Skilling, that when he came to you he did not 
describe these conflicts of interest. He didn't describe his 
huge apprehension with these partnerships. And he didn't relay 
his angst about this whole process. And you are saying to me 
today that you remember him coming in, but he was just talking 
about compensation, and you really don't really have much 
information on the financing structure of the LJMs. I have a 
hard time believing that.
    Mr. Greenwood. The time of the gentleman from Florida has 
expired. The Chair recognizes the gentleman from Illinois, Mr. 
Rush.
    Mr. Rush. I want to try to get us out of the quagmire that 
we seem to be in as it relates to the meeting in Florida and 
what transpired at that meeting in Florida. And I want to ask 
Dr. Jaedicke, were you at that meeting in Florida?
    Mr. Jaedicke. Yes, I was, sir.
    Mr. Rush. Okay. Do you recall Mr. Fastow telling you that 
Mr. Skilling would approve every LJM deal?
    Mr. Jaedicke. Sir, that occurred, I believe, in the Finance 
Committee or the Board of Directors. I know it is in the 
minutes. I do not personally recall that discussion.
    Mr. Rush. Yes. Mr. Winokur, were you at that meeting in 
Florida?
    Mr. Winokur. Yes, sir, I was.
    Mr. Rush. Do you recall Mr. Fastow telling you that Mr. 
Skilling would approve every LJM deal?
    Mr. Winokur. Sir, I believe that the minutes, as presented, 
were correct and were approved by the Finance Committee. And so 
to the best of my recollection these are what happened.
    Mr. Rush. Okay. Let me ask Mr. Skilling, were you at that 
meeting?
    Mr. Skilling. Like I said, I was at the meeting. I walked 
into and out of the Finance Committee on several occasions, but 
I was at that meeting.
    Mr. Rush. Okay. Mr. Winokur, do you recall Mr. Skilling 
being at that meeting?
    Mr. Winokur. Sir, the minutes report that he was there, and 
that he participated in the conversation. I have no other 
recollection than what the minutes say.
    Mr. Rush. Okay. So he participated in the total discussion, 
all of the conversations, particularly as it related to the 
issue of controls and his sign-off?
    Mr. Winokur. Sir, to the best of my knowledge, the minutes 
reflect what happened. I have no other recollection.
    Mr. Rush. Okay. Did anyone ever tell the Board that Mr. 
Skilling wasn't going to sign off on the LJM deals?
    Mr. Winokur. Congressmen, if that is a question directed at 
me, no one ever told me of that.
    Mr. Rush. How about you, Dr. Jaedicke?
    Mr. Jaedicke. No, sir. I do not recall ever hearing that.
    Mr. Rush. So are you--are both of you under the opinion 
that Mr. Skilling would sign off on all of the LJM deals?
    Mr. Jaedicke. Yes, sir, I was.
    Mr. Rush. Okay. Do you--Mr. Winokur?
    Mr. Winokur. Sir, the presentation said--the minutes 
described that these were mechanisms that already had been put 
in place. I believe that these had been put in place, and I 
never was told otherwise.
    Mr. Rush. All right. Let me refer you to the minutes here 
on page 2. It says, ``He,'' which is Mr. Fastow, ``He then 
discussed the mechanisms that had been put in place to mitigate 
any potential conflicts, including, one, his fiduciary 
responsibilities to the company; two, the Office of the 
Chairman or the Board could ask him to resign from LJM funds at 
any time; three, Messrs. Buy, Causey, and Skilling approve all 
transactions between the company and the LJM funds; four, that 
there is an annual Audit and Compliance Committee review of the 
company's transactions with the LJM funds; five, a review of 
his economic interest in the company and the LJM funds is 
presented to Mr. Skilling; and, six, there is no obligation for 
the company to transact with the LJM funds.'' Do you recall 
those statements?
    Mr. Winokur. Yes, sir, I believe that the minutes reflect 
accurately the discussion to the best of my recollection.
    Mr. Rush. Okay. Now, as of on the fifth criteria that you 
have here, ``Review of his economic interest in the company and 
the LJM funds is presented to Mr. Skillings,'' was that ever 
done? Was that financial review or economic interest review 
ever done by the company or by your committee?
    Mr. Winokur. Not by my committee, sir.
    Mr. Rush. Okay. Was that ever done by Mr. Skilling?
    Mr. Winokur. Sir, I think Mr. Skilling is better----
    Mr. Rush. Mr. Skilling, was that ever done by you? Did you 
ever do----
    Mr. Skilling. Yes. This was requested, that Mr. Fastow give 
me a summary of his economic interest. He presented me with a 
handwritten document subsequent to that that gave a view of his 
economic interest in LJM.
    Mr. Rush. Can you explain to the committee what that 
economic review indicated? What did it state?
    Mr. Skilling. As best I recall--and I don't have a copy of 
it--but as best I recall, it was a handwritten sheet of paper, 
and it basically was split onto two sides. And on one side it 
said something to the effect of total return to Mr. Fastow 
under a set of assumptions. And the set of assumptions, as I 
recall, was a 20 to 25 percent rate of return on LJM over a 5-
year period, and this was a cumulative 5-year return that he 
would earn from his interest in LJM.
    On the other side of the page was a calculation that showed 
under the assumption that Enron stock price continued to grow 
at 15 percent a year, which was our basic assumption when we 
were doing compensation decisions, if Enron stock continued to 
grow at 15 percent a year, what would his total compensation 
package be from Enron.
    And, again, I do not have a copy. I don't have a copy of 
this, but my recollection is that the number that was shown for 
Enron compensation from his ownership of Enron stock and 
options was consistent with what had been presented to our 
Compensation Committee, because we did the same sort of 
calculation in the Compensation Committee.
    The number that was shown for LJM was something on the 
order of one-fifth of that number. It was a much smaller 
number. And I said to Andy, ``How have you calculated or 
accounted for fees?'' Because I think, as Mr. McMahon 
mentioned, it would be typical to have a 2-percent fee related 
to this. He said, ``I have not included--I have included the 
fees, but I have not included expenses associated with that 
fee.''
    Mr. Rush. Can you tell us what those numbers were, what 
percentages?
    Mr. Skilling. You know, I eyeballed it, and what I came up 
with just eyeballing it was that a cumulative 5-year rate of 
return, or return to Mr. Fastow, would be something on the 
order of one-tenth of what his return would be from his Enron 
stock assuming that our stock continued to escalate. And if 
pushed----
    Mr. Rush. Can you tell us the amounts? Can you----
    Mr. Skilling. You know, horseshoes and hand grenades. My 
recollection is that the number he had for total Enron-based 
compensation if the stock continued to escalate would have been 
something on the order of $50 million. And so a ten to one 
ratio--it is my recollection that the number that was presented 
for LJM would have been something on the order of $5 million 
over the time period.
    Mr. Rush. So he was really making--he said he would make 
$10 million, but he was really making $30 million over a 2-year 
period, is that right? Is that what you are saying?
    Mr. Skilling. The presentation that Mr. Fastow presented to 
me was a projection for a cumulative 5-year rate of return. So 
this was from that--from the inception of LJM, for the next 5 
years under a set of assumptions, which was a rate of return of 
the fund, how much he would make over 5 years. And my 
recollection is that was something one-tenth of the order of 
the number that----
    Mr. Rush. But he really made $30 million during this period 
of time, is that right?
    Mr. Skilling. I don't know. I have read the same newspaper 
accounts that I am sure you have read. I have seen those 
numbers. I have no first-hand knowledge of that.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the gentleman from Louisiana, Mr. John.
    Mr. John. Thank you, Mr. Chairman.
    Mr. Skilling, do you believe that the implosion of Enron 
started August 15?
    Mr. Skilling. No, I don't believe that.
    Mr. John. Okay. So you left on August 14, and what I am 
hearing from you is that you did not know about these documents 
or deals, and you were not apprised of that. And it just seems 
fascinating to me that the seventh largest corporation, the 
largest bankruptcy in America's history, if you like football 
somewhat, the analogy could be that you were at times the 
quarterback as the CEO, did not know of anything happening, and 
your departing words were everything seemed fine when you left 
on August 14.
    So think that maybe it started before you left, the 
deterioration of Enron, and what ultimately happened and took 
only 4 months?
    Mr. Skilling. Listen, all I can do is I can hypothesize. I 
don't have the facts. I mean, I left----
    Mr. John. You were the quarterback.
    Mr. Skilling. I left on August 14, and I know what I knew 
on August 14, and I know what I didn't know on August 14. And a 
lot transpired subsequent to me leaving. Again, as I have said, 
my hypothesis, my conjecture, is that it was a run on a bank, 
that there was a liquidity issue. That is pure conjecture on my 
part.
    It seems consistent with the sort of panics and the sort of 
changes or meltdowns of financial institutions that you used to 
see at the turn of the century because I can't for the life of 
me--cannot for the life of me understand how we could go from 
where I thought the company was to bankruptcy in such a short 
period of time.
    Mr. John. Mr. Jaedicke, do you--in as short as you can, can 
you surmise what you think ultimately happened?
    Mr. Jaedicke. I am sorry. Do you mean what ultimately----
    Mr. John. What ultimately happened to the demise in the 
deterioration of 4 months. I mean, in as few words as you 
possibly can, I know it is a very complicated situation.
    Mr. Jaedicke. Well, sir, I am not the expert on this. As I 
look back, I guess I would say that if some of our asset sales 
and things like that had gone better at the time, that may have 
helped. That didn't happen. There was a liquidity issue. I 
think the market lost confidence in Enron.
    Mr. John. Why do you believe that they did lose confidence? 
Did it have anything to do with these partnerships that were 
capitalized by Enron's stock?
    Mr. Jaedicke. I would imagine it did, sir. I would imagine 
it did.
    Mr. John. Okay. Let me read--Mr. Skilling, I would like to 
read a part of the Powers report, and I would like your--if you 
agree or not. As a result of Enron's partnerships, particularly 
the Raptors, Enron improperly inflated its reported earnings 
for a 15-month period from the third quarter 2000 to the third 
quarter 2001 by over a billion dollars.
    This means that more than 70 percent of Enron's reported 
earnings for the period were not real. How could this have 
happened? Let me ask you, how could this have happened?
    Mr. Skilling. I have no understanding of where that number 
came from. That was certainly not my----
    Mr. John. Is that a fact that in a 15-month period that the 
earnings were overstated?
    Mr. Skilling. As I told you, when I left on August 14, I 
thought the financial reports accurately represented the 
financial condition of the company. I don't know what that 
billion dollars number is. I don't know what the assumptions 
were that went into that.
    Mr. John. Mr. Winokur, do you, as an architect of this 
report, do you agree with what I just read?
    Mr. Winokur. Sir, the committee relied on the Deloitte & 
Touche accounting consultants for those numbers. To the best of 
my knowledge as a member of the committee, those are right 
under the assumptions that they used to develop them. We have 
not heard, obviously, Arthur Andersen's response to the 
Deloitte & Touche analysis.
    Mr. John. Here is another statement of the Powers report, 
which really I think surmises, I believe, the root of what 
happened, and it was the non-transfer of risk in some of these 
partnerships. So when, in particular, one that I am somewhat 
familiar with--there were lots of them--was the Rhythms. I 
think it was--I don't remember the--the Cayman partnership.
    Basically, what happened is that partnership needed 
capitalization to purchase a put from Enron. And the 
capitalization--under the rules they needed 3 percent outside 
funds at an arms length and unrelated party. The money that 
this partnership got was stock from Enron.
    So, in fact, it was a double whammy as the stock of Rhythms 
obviously, as a dot com, would go down--was going down. The 
partnership could not--did not have the assets that they had 
because the fact that the dollars were eroding from the stock, 
plus the stock at Enron.
    So there was no risk, and that is what the Power Report 
kept alluding to, that the only way that these things were 
legal and not fraudulently done was to make sure that some of 
the risk was out of the hands of the primary company. And in 
this case Enron's stock was supporting and capitalizing all of 
these partnerships, and they were approved by somebody in the 
companies. And I believe that that is ultimately what happened. 
And we have 4,000 people that--and many, many investors that 
lost their money.
    I am out of time, but I will be back.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    And I guess the frustration that my colleague from 
Louisiana has expressed I can't believe a Board of Directors 
that is paid $300,000 a year, that for two and a half hours on 
the Finance Committee did not see what was happening.
    And, Mr. Skilling, sitting here and listening that you 
didn't know as the CEO--let me quote--in your testimony earlier 
you said financial statements, when you left on August 14, were 
reflective of the good condition of the company. I am 
paraphrasing, but is that what you said?
    Mr. Skilling. I said that I believed that the financial 
statements that had been released were reflective of my 
understanding of the financial condition of the company.
    Mr. Green. Well, I don't know how you could tell that, 
because we had testimony yesterday that nobody could understand 
Enron's financial statements. And it was based on trust, and 
that is what, if it was a run on the bank--I disagree with 
that--but it was because that trust was lost, and that is what 
happened.
    Let me follow up on the testimony of my colleague. On 
August 14, everything was fine, and yet in the Powers report 
from the Board, as a result of Enron's partnerships, 
particularly the Raptors, it inflated its reported earnings for 
a 15-month period from the third quarter of 2000 to the third 
quarter of 2001 by more than a billion dollars.
    That means that 70 percent of Enron's reported earnings for 
this period were not real. How could this have happened? That 
was on your watch. How could it have happened without some 
inkling that the COO would know?
    Mr. Skilling. Congressman, again, I don't know where that 
number came from.
    What was the accounting firm that did it, Mr. Winokur?
    Mr. Green. Well, let me go on to continue to quote the 
Powers report, so we don't--we only have 5 minutes. ``By March 
of 2001, it appeared that Enron would be required to take a 
charge against earnings of more than $500 million.'' That is in 
March of 2001; didn't actually have to do it until October that 
maybe started the run on the bank that you said. Five hundred 
million to reflect the inability of the Raptors to pay. Rather 
than take that loss, Enron compounded the problem by making 
even more of its own stock available to the Raptors, $800 
million worth.
    Again, that was on your watch, well before August 14. You 
know, and, again, that is in the Powers report from the Board 
of Directors that you served with. Again, how can someone who 
is a CEO not have some inkling of what is happening?
    Mr. Skilling. Well, again, the intent, as I understood it--
and I believe the intent as the Board and the rest of 
management understood it--is that we were creating a hedge for 
some highly volatile, high technology stock investments. In the 
first quarter of 2001, many of those high technology 
investments were dropping in value. The entire optical fiber 
business was collapsing at that point.
    Mr. Green. Okay. That was a half a billion dollar hedge. 
Now, even with Enron that was more than pocket change.
    Mr. Skilling. I did not hear that number, Mr. Green. I had 
asked, what is the status of our hedges? Are our hedges all 
right? And I was assured that our hedges were correct. So to 
the best of my knowledge----
    Mr. Green. Okay. Let me----
    Mr. Skilling. [continuing] it was not an issue at that 
time.
    Mr. Green. Well, let me get on to another question to Mr. 
Winokur. Mr. Winokur, in your testimony you said, ``I must tell 
you that as a member of the Special Investigative Committee, 
and more generally as an independent member of the Board, have 
been deeply disturbed by what the investigation revealed. The 
report makes clear that those in management on whom we relied 
to tell us the truth did not do so.'' Who didn't tell you the 
truth? Was it Mr. Skilling before August 14? And what didn't 
they tell you?
    Mr. Winokur. Sir----
    Mr. Green. Was it the half a billion dollars that we knew 
about that management--somebody in management knew about in 
March of last year?
    Mr. Winokur. Congressman, the earnings restatement--
accounting restatement in September included Chewco, and we 
were not told that Mr. Kopper was a participant as an Enron 
employee. And we, of course, did not know as the Board that 
there was not adequate capitalization. It was the LJM Rhythms--
--
    Mr. Green. Okay. The Powers report----
    Mr. Winokur. [continuing] who had been there as an 
accounting----
    Mr. Green. Excuse me. Let me finish. The Powers report 
reported--and I mentioned it--the $800 million.
    Mr. Winokur. Yes, sir.
    Mr. Green. Did the Board have any idea that that was being 
done?
    Mr. Winokur. We had no idea.
    Mr. Green. You know, the Powers report also mentions that 
the Finance Committee met regularly, five times per year, for 
an hour and a half to 2 hours, typically before each regular 
Board meeting. It seems like there should have been a lot more 
time spent if a half a billion dollars and $800 million can be 
lost.
    Mr. Winokur. Sir, had we been presented with the prospect 
of an $800 million equity requirement to be issued to overcome 
the $500 million of losses in Raptor, I believe we would have 
taken substantially more time.
    Mr. Green. I know a lot of Members of Congress--and I was 
on a hospital board as an outside member, and we had the lead 
because--as a Member of Congress. But our job was to ask those 
questions of management on a very small scale compared to 
Enron. And those questions weren't asked. I can see maybe in 
1\1/2\ or 2 hours five times a year maybe the Finance Committee 
didn't have the time to do it.
    But, again, the Board has a responsibility, and it looks 
like from the Powers report you can only say they didn't tell 
us so far. And I guess that is what surprises me. The testimony 
from both of you today--and Mr. Skilling is that, you know, we 
were--maybe we were born at night but not last night. And that 
is just amazing what we are hearing, that we didn't know as 
Board members. We were paid $300,000 a year to be Board 
members, and you didn't ask questions. I know people who are 
paid $1,000 for a meeting or $500 a meeting who ask tougher 
questions.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chairman recognizes the gentleman from Massachusetts, Mr. 
Markey, for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman.
    What day, Mr. Skilling, did you leave Enron?
    Mr. Skilling. August 14.
    Mr. Markey. August 14. Sherron Watkins wrote a memo on 
August 14 to Ken Lay, and she said, ``Skilling is resigning now 
for personal reasons, but I think he wasn't having fun, looked 
down the road and knew this stuff was unfixable and would 
rather abandon ship now than resign in shame 2 years later.'' 
Same day you are resigning this woman down deep in the company 
knows about all of these problems, everything that is going on. 
And you are sitting here as the CEO saying you just decided on 
the same day you are walking away and you really don't know 
much about any of the things that any of the members here are 
asking about here today.
    Wasn't Ms. Watkins really correct that you were abandoning 
ship on a day that you already knew, as she did, that this 
company had deep problems, that you had already identified 
them, and you were just walking away without warning investors, 
without warning employees, without telling everyone what the 
real reason was that you were quitting Enron?
    Mr. Skilling. Congressman, I can just say, again, on the 
day I left I absolutely unequivocally thought the company was 
in good shape.
    Mr. Markey. Well, it is hard to believe, Mr. Skilling, 
given your reputation or competence or hands-on knowledge, and 
the fact that there was plenty of evidence that other people 
knew all throughout the company that there was a big problem, 
not just one big problem but multiple problems.
    Now, Mr. Skilling, according to the Watkins memo, Mr. 
McMahon and Mr. McMahon's testimony and the Powers Committee 
report, Mr. McMahon approached you with serious concerns about 
the inherent conflicts of interest in LJM. Is that true?
    Mr. Skilling. Again, my recollection of the discussion that 
I had with Jeff is that he was concerned that because there was 
a conflict of interest with Andy that in discussions that they 
had that that would somehow hurt his compensation.
    Mr. Markey. So did he lay out specific steps that he 
thought should be taken to address these conflicts?
    Mr. Skilling. I don't recall.
    Mr. Markey. You don't recall. Now, according to both the 
Watkins memo and the Powers report, you took no action after 
McMahon warned you, even after being told that Fastow was 
pressuring Enron employees who were negotiating with LJM. Is 
that true?
    Mr. Skilling. In the discussion, again, as I recall on that 
day when Jeff came in to see me, he said he was concerned about 
his compensation. And I said, ``Jeff, you know how compensation 
is determined around here,'' and maybe you all don't know this. 
But our compensation system was based on something called the 
PRC, Performance Review Committee. There were typically 20 to 
24 people on the Performance Review Committee. Jeff's concern 
was that Andy was on that Performance Review Committee and 
might influence his compensation.
    What I said to Jeff is, ``Jeff, if you negotiate hard on 
behalf of Enron, and if you take a baseball bat to Andy Fastow 
in a negotiation that benefits Enron Corporation, 23 of the 24 
people on that committee will be cheering for you.''
    Mr. Markey. Okay. Three days later, you reassign Mr. 
McMahon. Now, why did you reassign him?
    Mr. Skilling. Well, first, I will say there was absolutely 
no connection--no connection----
    Mr. Markey. He is warning you about conflicts of interest. 
You don't take any action. Three days later he gets reassigned. 
There is no connection.
    Mr. Skilling. There is absolutely no connection.
    Mr. Markey. You resign on August 14. Sherron Watkins writes 
a memo on August 14. There is no connection.
    Mr. Skilling. I think Sherron wrote the memo in part 
because I did resign.
    Mr. Markey. Right.
    Mr. Skilling. I wouldn't be at all surprised if that is 
what triggered it.
    Mr. Markey. Exactly.
    Mr. Skilling. She certainly didn't confide her concerns 
with me. But as far as the relationship between Jeff McMahon 
moving the finance group into the industrial products group, 
there was no connection whatsoever. It was a huge promotion for 
Jeff.
    Mr. Markey. A huge promotion. Not viewed as----
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the gentleman from California, Mr. Waxman, for 
5 minutes. Mr. Waxman, do you care to inquire?
    Mr. Waxman. I do.
    Mr. Greenwood. You have 5 minutes, sir.
    Mr. Waxman. Mr. Skilling, did you know--you knew there were 
partnerships, didn't you?
    Mr. Skilling. Yes.
    Mr. Waxman. Who came up with the idea of the partnerships?
    Mr. Skilling. Which partnerships in specific--I mean, Enron 
had literally thousands of partnerships, and they came from 
various of the operating business units.
    Mr. Waxman. So you knew there are thousands of 
partnerships. Did you know that--you have said that to your 
knowledge you didn't have any idea that Enron was in a shaky 
financial situation, and you don't think you misled others. But 
in March 2001, Bethany McLean, a reporter with Fortune 
magazine, first raised questions about Enron's financial 
condition.
    She wrote in Fortune magazine that the company's financial 
reports were missing crucial information. She asked a simple 
question in the article that no one could seem to answer. How 
exactly does Enron make its money? Mr. Skilling in response to 
this criticism--you reportedly called Ms. McLean unethical and 
not doing her research. Three Enron executives flew to New York 
to try to convince Fortune's editors that Ms. McLean was wrong. 
Kenneth Lay also called Fortune's managing editor to complain.
    Mr. Skilling, it is clear now that Ms. McLean was right, 
and that you were wrong. She was asking all of the right 
questions about how Enron made its money. If that is the case, 
it appears as if you were trying to bully someone who was 
asking very basic questions about Enron. How could it be that 
she would know basic questions about Enron and raise them, and 
you didn't seem to know about them? You got very upset at her, 
didn't you?
    Mr. Skilling. I very specifically remember the telephone 
conversation that I had with the Fortune reporter. As a matter 
of fact, she had been working on a story, it was my 
understanding, for about a week. She had called up and said she 
wanted 15 minutes of time to discuss some issues, remaining 
issues related to this report. I said fine.
    And I was between two meetings--I think it was at 9:30, 
between 9:30 and 9:45 some Tuesday--or it might have been a 
Monday morning. I forget the specific day, but there was 15 
minutes carved out of my calendar to spend some time with the 
Fortune reporter. She called up and started asking some very, 
very specific questions about accounting treatment on things. I 
am not an accountant, and I could not answer them, and I said 
to her----
    Mr. Waxman. But her----
    Mr. Skilling. I said to her, ``Look, we can have our people 
come up. I will have our Chief Accounting Officer. I will have 
our Chief Financial Officer. I will have whoever you want come 
up to explain these specific transactions. I have got 6 minutes 
left before I have to be in a meeting, and I can't get into the 
details, and I am not an accountant.'' And she said, ``Well, 
that is fine. We are going to do the article anyway,'' and I 
said, ``If you do that, I personally think that is unethical, 
because we are making available whatever resources you need to 
get full and fulsome answers to the questions that you have.''
    Mr. Waxman. Mr. Skilling, let me interrupt you.
    Mr. Skilling. And the next day----
    Mr. Waxman. Let me interrupt you.
    Mr. Skilling. [continuing] our Chief Financial Officer and 
our Chief Accounting Officer flew to New York at Enron's 
expense to sit down, not with the editors but to sit down with 
the reporter on that story and help her understand the 
questions that she was asking.
    Mr. Waxman. And was her article critical?
    Mr. Skilling. Yes, it was.
    Mr. Waxman. And did that raise any concerns in your mind 
that maybe she knew something that you should know about?
    Mr. Skilling. I will give you my recollection of the gist 
of the article--is basically she was saying that we continue to 
sell at a high PE multiple, and that was at a time when anyone 
that had a high PE multiple was being absolutely hammered in 
the stock market. This was February and March of 2001, and so I 
think the basic accusation was that we were at a high PE 
multiple and our PE multiple was too high.
    Mr. Waxman. The next month, April 2001, you were in a 
conference call with Anliss to discuss the company's first 
quarter earnings. During that conference call, Richard Grubman 
of High Fields Capital Management was critical of you for not 
being able to produce the company's balance sheet, which is a 
basic piece of financial information. Instead of providing him 
with a balance sheet, you called him a vulgar name. As I 
understand, you called him an asshole.
    Now, you were obviously upset that he was raising a 
question. He was an outsider raising a question about the 
balance sheet of your company. Why were you so upset, and did 
it raise in your mind that maybe that he knew something you 
ought to find out about?
    Mr. Skilling. Congressman, he did not, to my recollection, 
raise an issue about our balance sheet. He was raising an issue 
about why we didn't publish our balance sheet on the same day 
that we came out with our earnings, which we have never done. 
There is a 3-day delay between the time that we issue our 
earnings release--or I think it is a 3-day delay--between the 
time we issue our earnings and when the balance sheet came out.
    And I explained that to him probably two or three times, 
and he kept coming back to it. We had a conference call. We had 
something on the order of 300 analysts who were waiting to ask 
questions on that conference call, and he refused to accept the 
fact that this was standard operating practice and always had 
been standard operating practice within Enron.
    If I could go back and redo things, I would not now have 
used the term that I used. I apologize to my shareholders. I 
apologize to you for having done that. At the time, I was 
tired. The man--I believe he was a short-seller of the stock. 
He had no interest in what was in the balance sheet. In my 
opinion, I thought he was very interested in just monopolizing 
the conversation to suggest that there was something wrong that 
I didn't believe was the case.
    Mr. Greenwood. The time of the gentleman from California 
has expired. The Chair notifies the committee and the witnesses 
that we are going to do a second round of questions. It 
probably will not take as long as the first round of questions, 
but we would ask your forbearance.
    The Chair recognizes himself for 5 minutes.
    Mr. Skilling, here is the problem I have at the end of this 
day. You came in here and you and I stood up and we raised our 
right hands and you swore to tell the truth. And before you did 
that, Mr. McMahon came in here and he and I raised our right 
hands and he swore to tell the truth.
    And when all is said and done, I can believe him or I can 
believe you, but there is no way I can believe both of you. And 
that is the problem that I have. And let me tell you why.
    On March 16, 2000, at 11:30, Mr. McMahon came into your 
office, and he brought with him these notes. And these notes 
would indicate he says--it is Tab 9 in your book if you would 
like to turn to it. And he says to you, ``I am in an untenable 
situation.'' He says that Andy Fastow wears two hats, and his 
up side compensation is so great that it creates a conflict.
    He says, ``I am right in the middle of it.'' He says, ``I 
find myself negotiating with Andy on Enron matters and am 
pressured to do what Andy wants. I do not believe this is in 
the best interest of the shareholders. I did not ask to be put 
in this position,'' he says.
    He says, ``My integrity forces me to continue to negotiate 
the way I believe is correct. However, Andy Fastow is my 
boss.'' He says, ``I must know, in order to continue to do 
this, I must know I have support from you, and there won't be 
any ramifications. I believe Andy Fastow has already affected 
my compensation.''
    He poured his soul out to you. He told you he is 
conflicted, his integrity is at stake. And he essentially said 
to you, ``We have got a cesspool here, boss, and I need you to 
clean it up, because I am not comfortable swimming in this 
cesspool any more.'' And he said, ``If you can't clean up this 
cesspool''--and this is the cesspool, of course, that took the 
company down not that long afterwards, he says, ``Then, get me 
out of it. Get me out of this cesspool, because I am not 
comfortable here anymore.''
    And you say, according to him, ``I will fix it. I will fix 
it.'' And he brings additional matters up. He brings up the 
fact that LJM is on the same floor, that the staff meeting has 
attendees from both. This is all a description of how this is a 
cesspool.
    So he says to you, ``You either clean up the cesspool or 
you get me out of the cesspool.'' You say, ``I will fix it.'' 
It looks to me like what you do is you say, ``I will get you 
out of the cesspool.'' Now, when you have been asked about that 
meeting, you have been asked repeatedly about that meeting, 
which to me if I were in your shoes and one of my staff people 
came in and said, ``The situation I am in is untenable, and it 
is compromising my integrity. Boss, help me,'' I would remember 
that. I would remember that if that were 3 years ago or 10 
years ago. Okay?
    And your recollection of that meeting seems to be, yes, 
Jeff came to see me about his compensation package, and we 
worked that out. Who is telling the truth?
    Mr. Skilling. I can only tell you my recollection of the 
meeting. I don't think from what I have seen on this piece of 
paper that there is anything that is radically different in my 
recollection. What Jeff is saying here is that requests are 
options. You have got to do one of two things. One, I must know 
I have support from you and there won't be compensation 
ramifications.
    Mr. Greenwood. What did he want your support for? He wanted 
your support because his integrity was at stake.
    Mr. Skilling. He wanted support----
    Mr. Greenwood. He said, ``It is untenable. It is wrong. How 
can we be in this situation we are''----
    Mr. Skilling. Congressman, my assumption and my 
recollection of the meeting was that he wanted my support in 
the Compensation Review Committee meetings, and I made it 
absolutely clear to him in that session, absolutely clear to 
him, that he should go with his conscience, he should do 
everything humanly possible to protect the interests of the 
Enron shareholders, and I would absolutely support him in that.
    And I think it is somewhat telling that he would come to me 
and he would say as long as I have got that commitment from you 
I am okay. And so----
    Mr. Greenwood. Well, why did he switch--well----
    Mr. Skilling. He switched jobs for--it was a totally, 
totally unrelated----
    Mr. Greenwood. Let me retract that question for a second. A 
guy comes to you and he says, ``Whether I am in this job, or 
the next guy is in this job, it is still a cesspool, because 
this is crazy, having my boss negotiating with me. He is in 
charge of my salary. I have got to either represent the 
stockholders or do what he wants me to do.'' He says, ``This is 
a nutty way and a dishonest way to do business.'' You don't 
walk out of that meeting saying, ``I have got to fix this''?
    Mr. Skilling. Congressman, again, your boss, under our 
compensation system and our performance review system, was not 
responsible for your compensation. It was a committee called 
the Performance Review Committee. And if everyone in that room 
believed that you were sticking up for Enron's interests, and 
your boss was----
    Mr. Greenwood. I am not asking you that question. I am 
asking you why it was that when he came to you and said, 
``Either get me out of the cesspool, or clean up the 
cesspool,'' that you didn't say, ``I will clean up the 
cesspool. I will not let this stand. I will go to Andy and say, 
'This doesn't work.' I will not only back you up if you happen 
to go to bat; I am going to go to bat because that is my job. I 
am the boss.''
    Mr. Skilling. I think you are mischaracterizing what the 
decision was and what the options were that were put to me. It 
is my recollection that Andy said he wanted my support. He 
wanted my support, and he wanted, if he got that support----
    Mr. Greenwood. Right. But the job that he ended up with he 
turned down. You know he didn't want that job. That wasn't his 
first choice. Earlier in the month he had turned that job down.
    Mr. Skilling. I have no recollection of that.
    Mr. Greenwood. He came to you and said, ``Boss, this place 
stinks. It is wrong. It is not right for the shareholders. It 
is an untenable position that conflicts the integrity of 
anybody who sits in this seat.''
    Mr. Skilling. I don't recall----
    Mr. Greenwood. And you say to him, ``We will get you 
another job.''
    Mr. Skilling. [continuing] that he said anything about this 
being bad for the shareholders. He was concerned that it could 
become bad for the shareholders if he did not have my support 
for him sticking up for Enron in those discussions, and I gave 
him my unequivocal support. There is no time--no time--that I 
have been at Enron Corporation that I have engaged in any 
decision that was not in the interest of----
    Mr. Greenwood. You said that you said you will fix it. And 
it seems to me that there is a difference between saying, ``I 
am right behind you. You go and cross swords. I will be behind 
you,'' and saying, ``Give me the sword. That is my job. I will 
fix it.''
    Mr. Skilling. I told Mr. McMahon, to the best of my 
recollection, that I totally supported him doing whatever 
necessary to protect the interests of Enron shareholders. And I 
believe that subsequent to that I also had some people check 
into this whole logistics issue of where people were sitting on 
the floor and all the rest of that, to see if we could clean 
that up as well.
    The decision of Mr. McMahon to leave, the decision was 
totally separate, was not in any way influenced--I have nothing 
but respect for Mr. McMahon, and there is absolutely no 
connection between those two activities.
    Mr. Greenwood. So he comes to you and he says, ``The 
Titanic is headed for an iceberg,'' and you say, ``I am going 
back to bed. But if you tell the guys to steer to the left, I 
will be right beyond you.''
    Chairman Tauzin. Mr. Chairman?
    Mr. Greenwood. My time has----
    Chairman Tauzin. Mr. Chairman, before you leave the line of 
questioning, if you will yield a second, I think it is 
important to note, and perhaps Mr. Skilling would like to 
comment upon it, that part of the fixing it was to bring in Mr. 
Glisan into that position, who not only was apparently willing 
to negotiate with Mr. Fastow but later on actually invested in 
one of his deals, I think contrary to the Board's policy, and 
turned a $6,000 investment into a million dollar investment. 
Was that part of fixing it?
    Mr. Skilling. As I have said before, and I will absolutely 
conclusively tell you, I did not know that Mr. Glisan has any 
investment interest whatsoever in any of those partnerships.
    Chairman Tauzin. And it should be stated for the record, 
Mr. Chairman, if you would continue to yield, that Mr. Glisan 
has repeatedly declined an invitation to be interviewed by 
investigators or to give us any statements in the matter. But 
it's important to put it in context, Mr. Chairman, that when 
Mr. McMahon was found a new job, the guy brought in to replace 
him not only apparently felt it a lot easier to negotiate with 
Mr. Fastow but actually got in bed with him and invested in the 
partnerships, and in 6 weeks turned a $6,000 investment into a 
million dollars. That was fixing it.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentlemen. The Chair 
recognizes the gentlemen from Louisiana, Mr. John.
    Mr. John. Thank you, Mr. Chairman.
    Mr. Jaedicke and Mr. Winokur, as Board members, what do you 
know about the Southhampton partnership?
    Mr. Jaedicke. Sir, we did not know about the Southhampton 
partnership until we read about it in the paper.
    Mr. Winokur. I agree with that.
    Mr. John. So let me refresh your memory of what the Powers 
report said about the Southhampton partnership. Mr. Fastow 
invested $25,000 in this partnership and received $4-1/2 
million in approximately 2 months. Two other employees, Mrs. 
Mordant and Mr. Gleason, invested $5,800 into that same 
partnership, Southhampton, and 2 months later they returned a 
million dollars. You did--as the Board of Directors of this 
company, you didn't know anything about this.
    Mr. Jaedicke. No, sir, not until we read about it in the 
paper. Not to my recollection.
    Mr. John. Since you have discovered this in the Powers 
report, your experience with being on the Board of Directors, 
you obviously should have had some say so or some knowledge of 
this. Who was responsible for notifying you or bringing it in 
front of you, the Board of Directors?
    Mr. Jaedicke. Well, sir, the original transaction to buy 
out CalPERS was represented to us as an unaffiliated third 
party. That was the arrangement to be engaged in. It was never 
ever brought back to us that it was not an unaffiliated third 
party, and that there was a related party in it.
    Certainly, the code of conduct would have required--take 
the code of conduct that was read, says that if any officer 
engages in a transaction that is adverse to the interest of 
Enron, he needs to have prior approval of that. That was not 
done.
    Mr. John. If this would have gone through the proper 
channels, and you would have received this as a Board of 
Directors, do you think that the Board would have signed off on 
this deal?
    Mr. Jaedicke. No, sir. Not if it was not proper. We also 
were assured that Arthur Andersen would be following the 
transaction of the buyout of JEDI, and that we also understood 
that they were reviewing those kinds of transactions. So I 
think it could have come to the Board for many different 
sources. It did not.
    Mr. John. It is interesting, let us move down to Chewco, 
too. For the life of me, I really can't understand how Mr. 
Kopper and his partners took a $125,000 investment in the 
Chewco deal and turned it into $10 million. Can you explain 
that? That is also part of the Powers report of which, Mr. 
Winokur, you were a part of.
    Mr. Winokur. Sir----
    Mr. John. How is this possible? How is this deal possible?
    Mr. Winokur. Congressman, the first I knew of those fees 
was what came to me during the investigation, the Special 
Committee report. I did not know, and I think no Board member 
knew, as the report says, that Mr. Kopper was involved in 
Chewco. And on the Southhampton matter that you asked before, 
again, none of those people should have been able to purchase 
the interests in Southhampton without a specific waiver from 
the CEO, according to the code of conduct.
    Mr. John. Mr. Skilling, have you ever heard of 
Southhampton?
    Mr. Skilling. No, I have--I had not heard of it until I 
believe the Special Committee asked some questions.
    Mr. John. The Special Committee that Enron----
    Mr. Skilling. The Board of Directors.
    Mr. John. [continuing] that the Board of Directors put 
together, of which Mr. Winokur was on.
    Mr. Skilling. I think that was in November.
    Mr. John. So you don't know--not only you just heard of 
this partnership, you had no idea about this extraordinary rate 
of return with Enron employees and being partners in 
Southhampton and Chewco.
    Mr. Skilling. Did not.
    Mr. John. Did not know anything about it.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair recognizes Chairman Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Skilling, I want you to look at Tab 17, please. It is 
the Sherron Watkins letter to Ken Lay. In that letter on page 
2, the very bottom--and I quote--she states, ``Employees quote 
our CFO as saying that he has a handshake deal with Skilling 
that LJM will never lose money.'' The CFO she is talking about 
is Fastow.
    And also, if you will look at the Special Committee's 
report on page 12, the Special Committee says, ``We have 
identified some evidence that in three of the transactions 
where Enron ultimately bought back LJM's interest, Enron had 
agreed in advance to protect LJM partnerships against loss.'' 
That is on page 12.
    Very specifically, is the allegation by Ms. Watkins' letter 
and the conclusions of the Special Committee report true? Did 
you, in fact, have an agreement, a handshake deal with Mr. 
Fastow to make LJM whole for any losses whatsoever?
    Mr. Skilling. Absolutely not.
    Chairman Tauzin. You totally, unequivocally deny her 
allegation and the findings of the Special Committee.
    Mr. Skilling. I believe Ms. Watkins said that rumor had it, 
so I don't believe it is her allegation. But, yes, I 
absolutely----
    Chairman Tauzin. What she said was that employees have 
quoted the CFO, Mr. Fastow, as saying that.
    Mr. Skilling. Yes.
    Chairman Tauzin. You say that is not true whatsoever.
    Mr. Skilling. Mr. Chairman, there was no handshake deal 
between myself and Mr. Fastow, period.
    Chairman Tauzin. And the committee, the Special 
Investigative Committee for the Board's finding of evidence to 
substantiate that is also incorrect?
    Mr. Skilling. I don't believe that the Special Committee of 
the Board used my name with relationship to that. I can only 
tell you what I know. I had no handshake agreement with Mr. 
Fastow that would guarantee him a rate of return on his 
investment.
    Chairman Tauzin. Mr. Skilling, what is the Office of the 
Chairman?
    Mr. Skilling. The Office of the Chairman was a concept that 
we applied for reporting purposes. The Office of the Chairman, 
when I originally joined the Office of the Chairman, when I 
became Chief Operating Officer, included myself, Ken Lay, and 
Rebecca Mark. When Rebecca Mark left, it was myself, Ken Lay, 
and Joe Sutton. And when Joe Sutton left, it was myself and Ken 
Lay.
    Chairman Tauzin. Now, according to the testimony given by 
Mr. Jaedicke, the code of conduct allows a senior officer to 
participate in a transaction in which he has a conflict of 
interest when Enron--with Enron, if the Office of the Chairman 
determines this would not adversely affect the interest of the 
company.
    Did the Office of the Chairman make such a determination 
when it came to Mr. Kopper and his dealings with Chewco or LJM 
Partnerships?
    Mr. Skilling. I do not recall that it did.
    Chairman Tauzin. But you knew that Mr. Kopper was involved 
in those partnerships.
    Mr. Skilling. I knew that Mr. Kopper was involved in the 
management of some of the partnerships. I did not know if Mr. 
Kopper had any----
    Chairman Tauzin. Is it your understanding that according to 
Mr. Jaedicke's testimony that the Office of the Chairman in 
which you were a part must have approved his operations in 
Chewco or LJM?
    Mr. Skilling. It was my understanding that the CEO of the 
corporation would have to approve a waiver from the conflict of 
interest.
    Chairman Tauzin. No, I have just read you what Mr. Jaedicke 
says is the policy, that the Office of the Chairman can 
authorize it if it is in the interest of the company.
    Mr. Skilling. We didn't----
    Chairman Tauzin. If you think Mr. Kopper was involved with 
Chewco and LJM, did you, as a member of the Office of the 
Chairman, understand that he had to get this approval from you 
and from Mr. Lay?
    Mr. Skilling. To be quite honest, Mr. Chairman, it is not 
clear. I am not the person that makes the determination of 
whether there is a conflict of interest. We have lawyers and 
our outside lawyers that determine if----
    Chairman Tauzin. I am not asking you about a conflict of 
interest. Let me try once again to take you through it very 
carefully, because you are under oath and I don't want to get 
this wrong for you.
    Mr. Skilling. Neither do I.
    Chairman Tauzin. I am going to read it carefully. The code 
of conduct allows a senior officer to participate in a 
transaction in which he has a conflict.
    Mr. Skilling. Wait. Say that again.
    Chairman Tauzin. The code of conduct allows a senior 
officer to participate in a transaction in which he has a 
conflict of interest----
    Mr. Skilling. Right.
    Chairman Tauzin. [continuing] with Enron, if the Office of 
the Chairman determines that this would not adversely affect 
the interest of the company.
    Mr. Skilling. Yes.
    Chairman Tauzin. My question is: knowing that Mr. Kopper 
was involved with Chewco, knowing he was involved with LJM, did 
you make such a determination as a member of the Office of the 
Chairman?
    Mr. Skilling. I don't recall that any determination was 
made, because I don't recall that there was ever an issue that 
there was a conflict of interest involved.
    Chairman Tauzin. Did you inform Mr. Lay that Mr. Kopper was 
involved with Chewco and LJM?
    Mr. Skilling. I don't recall.
    Chairman Tauzin. Do you know whether Mr. Lay was aware of 
whether Mr. Kopper was involved?
    Mr. Skilling. I am not aware what Ken knew, but the--Mr. 
Kopper's participation was well known throughout the company.
    Chairman Tauzin. Mr. Jaedicke, on page 9 of your----
    Mr. Skilling. By the way, it was known by Vinson & Elkins, 
who would have had responsibility----
    Chairman Tauzin. I am sorry. I didn't hear that. Say that 
again.
    Mr. Skilling. His participation in Chewco was also known by 
Vinson & Elkins, to my knowledge. It is my understanding that 
Vinson & Elkins knew that he was involved, and I believe they 
would have identified, to the extent there was a conflict of 
interest, that a waiver needed to be received.
    Chairman Tauzin. Did Vinson & Elkins report to Mr. Lay or 
to you after they had researched the issue following Ms. 
Watkins' letter that Mr. Kopper might require such a waiver?
    Mr. Skilling. Mr. Chairman, I had left the company at that 
point.
    Chairman Tauzin. Let me go back to page 9, then, Mr. 
Jaedicke, on the--on number 7 of the controls that you say were 
instituted to protect the company in this extraordinary 
situation of these partnerships. On number 7 you say, ``An LJM 
approval process checklist was to be filled out to ensure 
compliance with the Board's directive that transacting with 
LJM, including questions regarding alternative sales options, a 
determination that the transaction was conducted at arms 
length, and a review of the transaction by Enron's Office of 
the Chairman.'' Now, you just heard Mr. Skilling define the 
Office of the Chairman----
    Mr. Jaedicke. Yes, sir.
    Chairman Tauzin. [continuing] as being Mr. Lay and himself 
and another officer from time to time, is that correct, sir?
    Mr. Jaedicke. Yes, sir.
    Chairman Tauzin. So it was the Board's opinion that all of 
these transactions had to be approved by Mr. Lay and by Mr. 
Skilling, is that correct?
    Mr. Jaedicke. I think by the Office of the Chairman, sir, 
probably would mean either one of them. It could be Mr. Lay or 
Mr. Skilling.
    Chairman Tauzin. But in any event, the Board's own controls 
required that you get the approval from one of these two top 
guys, right?
    Mr. Jaedicke. That was exactly our understanding, sir.
    Chairman Tauzin. But were you satisfied on every one of 
these transactions that either Mr. Skilling or Mr. Lay approved 
the transaction?
    Mr. Jaedicke. Sir----
    Chairman Tauzin. And apparently an approval process 
checklist was to be filled out. Did you ever ask for the 
approval process checklist to see whether either one of them 
had approved these transactions?
    Mr. Jaedicke. I don't know that I ever saw the approvals 
checklist, but we always inquired and were--and had read--had 
gone over this in the Audit Committee, for example, the 
controls that were in place.
    Chairman Tauzin. So, in effect, are you telling us in all 
cases somebody told you Mr. Skilling or Mr. Lay has approved 
this.
    Mr. Jaedicke. We were told that the controls were in place, 
they were being followed, and they were working.
    Chairman Tauzin. Mr. Winokur, could you help us with this?
    Mr. Winokur. Congressman, the Finance Committee also was 
told repeatedly by members of management that the controls were 
in place and were working effectively.
    Chairman Tauzin. Including this control number 7.
    Mr. Winokur. I don't recall in the Finance Committee that 
the specific control was listed when we got our report, I 
believe it was from Mr. Causey.
    Chairman Tauzin. Just as a general statement, I mean, help 
me here, you are members of a Board, and the Board has 
managers. It has a Chairman and a Chief Operating Officer, all 
of these officials.
    Mr. Jaedicke. Sir, this particular control would have been 
one that was listed, identified as a specific control in the 
report to the Audit Committee.
    Chairman Tauzin. Right.
    Mr. Jaedicke. That was there.
    Chairman Tauzin. Did you ever ever, in the conduct of all 
of your business as a Board member, ever believe that Mr. Lay 
or Mr. Skilling was not aware of and approving these 
transactions?
    Mr. Jaedicke. If your question is, did I think there was 
any misunderstanding on that? Is that----
    Chairman Tauzin. Yes.
    Mr. Jaedicke. No, they knew the importance of these 
transactions must have been--had to be well known throughout 
management.
    Chairman Tauzin. Certainly, the----
    Mr. Jaedicke. Because the Board spent a lot of time on 
these controls.
    Chairman Tauzin. Yes.
    Mr. Jaedicke. And it was alleged to us that they were being 
followed, that they were in place, and they were working.
    Chairman Tauzin. Well, how do you----
    Mr. Jaedicke. They were being followed.
    Chairman Tauzin. [continuing] react to Mr. Skilling sitting 
there right next to you today saying he didn't know that--
didn't approve--didn't know he had to approve, didn't know as 
part of the Office of the Chairman that he had to handle the 
potential conflict of Mr. Kopper? How do you handle that, 
knowing as a Board member that common sense tells you the top 
officers of the corporation must know about these transactions, 
must know about who is a party to them, who is running them, 
who is negotiating for the company, and on the other side of 
the table? How do you handle that? Is his testimony, in your 
opinion, correct, that he didn't know?
    Mr. Jaedicke. Sir, I could only tell you what the 
requirements were, what the Audit Committee and others heard 
about the controls working. It was--we did not know that--to my 
knowledge, that these approval sheets were not being signed and 
not being reviewed as it was--as these controls called for. I 
cannot tell you why that happened.
    Chairman Tauzin. Now, in fact, Mr. Winokur, in your 
testimony, you make it pretty clear. You say on page 7 that Mr. 
Skilling reported to us that he was discharging these 
obligations. It now appears that he did not do so. Do you stand 
by that testimony?
    Mr. Winokur. Sir, in the Finance Committee--and I don't--I 
will have to find the date--we had a report from Mr. Causey 
with Mr. Buy and Mr. Skilling present is my recollection, that 
said all of the controls that had been put in place with 
respect to the LJM partnerships were working effectively.
    Chairman Tauzin. I just want to leave you with one little 
fact that just astounds me. That if you had a control that said 
there was an approval process checklist to be filled out, to be 
filled out to guarantee that the Office of the Chairman 
approved these transactions--and I am looking at one, and it 
says very clearly on it, person negotiating for LJM, Michael 
Kopper, this approval sheet that under your controls had to be 
filled out and one of the two top officers of the corporation 
at least, perhaps Mr. Skilling specifically if number 4 is 
correct, had to sign it to say that everything was okay, 
identifies Mr. Kopper as the guy negotiating for LJM, when 
everybody knows that he is an important official in Enron, that 
he never got a waiver from anybody to negotiate against Enron, 
and, nevertheless, we are doing deals with him, under controls 
that require this thing to be filled out, signed, so all of you 
could see that, in fact, things were being operated under the 
code of conduct that you guys obviously were there to enforce. 
How could this happen? Yes, sir, please.
    Mr. Jaedicke. I don't know how it could happen, sir. I 
would expect that if it had happened it would have been brought 
to our attention.
    Chairman Tauzin. But it did. And nobody brought it to your 
attention?
    Mr. Jaedicke. Nobody brought it to our attention, sir.
    Chairman Tauzin. And the gentlemen sitting next to you, Mr. 
Skilling, is one of those who didn't bring it to your 
attention, is that correct, Mr. Winokur?
    Mr. Jaedicke. Well, sir, I would expect--there were a 
number of controls, I believe, where this could have come to 
our attention. One is the sign-off of the Office of the 
Chairman.
    Chairman Tauzin. Yes.
    Mr. Jaedicke. And so if that control had worked, I think we 
would have known about it. To my knowledge, we did not know 
about it.
    Chairman Tauzin. Do you believe that Mr. Lay is correct in 
the interviews he gave to your Investigative Committee that he, 
too, was being deceived?
    Mr. Jaedicke. Sir, I was not on the Investigative 
Committee.
    Chairman Tauzin. Mr. Winokur?
    Mr. Winokur. Congressman, I was not at the interview of Mr. 
Lay. I read the interview notes, and I believe that he did not 
know that Mr. Kopper participated in Chewco or LJM, but that is 
my belief. I was not there to question them.
    Chairman Tauzin. Thank you very much, Mr. Chairman.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the gentleman from Michigan, Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Winokur, I am looking at your testimony and I am on 
page 7. In the third paragraph down it says, ``We also required 
the Office of the Chair to remain in control of Mr. Fastow's 
participation.'' Office of the Chair, who was that at that time 
that you are referring to here?
    Mr. Winokur. Well, I believe in the time period of 1999 and 
2000 it was Mr. Skilling and Mr. Lay to the best of my 
recollection.
    Mr. Stupak. Okay. So both Mr. Skilling and Mr. Lay.
    Mr. Winokur. Yes, sir.
    Mr. Stupak. Okay. In order to ensure that--going on, that 
this duty was honored, Mr. Skilling and Mr. Lay were given the 
authority to require Mr. Fastow to resign at any time from his 
involvement with LJM. Mr. Skilling was also charged with the 
responsibility to supervise Mr. Fastow's involvement to make 
sure it did not become a disruption to the company and to 
ensure that his compensation from the LJM transactions were 
moderate. Mr. Skilling reported to us that he was discharging 
these obligations. Now it appears he did not do so.
    So this control that you had here, which really was at the 
hands of Mr. Skilling, failed in this aspect with Mr. Fastow. 
Is that your testimony?
    Mr. Winokur. Congressman, Mr. Fastow reported to Mr. 
Skilling and Mr. Lay. Mr. Skilling and Mr. Lay had every bit of 
their compensation tied totally to Enron's stock. So it seemed 
to the Board when this was set in place that they had two 
reasons to make sure that the compensation was moderate.
    Mr. Stupak. I am not talking about his moderate. I don't 
care what he was compensated. I care about the last line that I 
just read to you. Mr. Skilling reported to us that he was 
discharging these obligations. Now it appears he did not do so. 
He did not do what? What didn't he do?
    Mr. Winokur. Congressman, as we have seen----
    Mr. Stupak. Mr. Winokur, this is your testimony. Nothing I 
am making up. I want to know, what does that line mean? What 
did Mr. Skilling fail to do?
    Mr. Winokur. Congressman----
    Mr. Stupak. What I have heard here so far today--we didn't 
have the information, we don't know, the lights went out during 
this Board meeting--this is pretty explicit here. It is your 
statement, sir. I would like you to tell me, what does that 
statement mean?
    Mr. Winokur. Congressman, the Special Committee report 
found that the Office of the Chairman in several instances did 
not review the LJM deal approval sheets, and that the 
compensation--I am sorry--that those sheets were to be signed 
by Mr. Causey, Mr. Buy, and Mr. Skilling. In the October 2000 
meeting, we were told they were--had been done so.
    Mr. Stupak. So in the first part of this sentence, Mr. 
Skilling reported to us that he was discharging these 
obligations. What did he tell you he was doing to lead you to 
believe he was discharging these obligations?
    Mr. Winokur. Mr. Fastow told us in October of----
    Mr. Stupak. Mr. Skilling. What did Mr. Skilling say--what 
did--Mr. Skilling reported to us that he was discharging these 
obligations, not Mr. Fastow, Mr. Skilling. What did he say that 
led you to believe that he was discharging his duties?
    Mr. Winokur. We were told by people with Mr. Skilling 
present that these duties were being fulfilled.
    Mr. Stupak. That is not what it says. It doesn't say other 
people reported to us, with Mr. Skilling present, certain 
things. What did Mr. Skilling report to us that he was 
discharging these obligations? I don't think my question--not 
my question, your words, are that difficult. All I want to 
know, what did he tell you? What did he report to you that he 
was doing his duties as CEO/COO? What was it?
    You put your faith in this man. He reported back to you. 
What did he report to you?
    Mr. Winokur. Congressman, I don't recall a specific report 
of his dealing with each of these controls. We had reports by 
other people with him present about his responsibilities, that 
the controls were working properly.
    Mr. Stupak. This is your testimony under oath.
    Mr. Winokur. Yes, sir.
    Mr. Stupak. That is not what you are telling me now. You 
said under oath in your testimony, ``Mr. Skilling reported to 
us that he was discharging''--reported to you as a member of 
the Board that he was discharging these obligations. It now 
appears he did not do so. What did Mr. Skilling report to you 
as a member of the Board that he was discharging his 
obligations? You are the Board. He reported to you. You are the 
only one who can answer that. Not what someone else told you, 
what did Mr. Skilling tell you as a Board member?
    Mr. Winokur. Congressman, Mr. Skilling did not report to me 
personally. I believe that he reported to the Board in a 
variety of circumstances that the partnerships were being 
managed properly and that all of the controls were in place. 
There is not a specific instance in which he reported to me 
personally that----
    Mr. Stupak. Reported to you as a Board member, right? He 
reported to you as a Board member. You are a member of the 
Board.
    Mr. Winokur. Yes, sir.
    Mr. Stupak. Okay. And you wrote this, right, this 
testimony?
    Mr. Winokur. Yes, sir.
    Mr. Stupak. So when it says, ``Mr. Skilling reported to 
us.'' I will give you that Board--that he was discharging these 
obligations. It now appears he did not do so. Is that your 
testimony here today?
    Mr. Winokur. Yes, sir.
    Mr. Stupak. And you can't remember exactly what it was that 
he reported to you that now in hindsight he is not doing?
    Mr. Winokur. No, I do not recall a specific instance of a 
report, but I recall specific instances of reports to the 
Finance Committee with Mr. Skilling present that the controls 
were all working, including the ones that Dr. Jaedicke referred 
to.
    Mr. Stupak. So then the written portion here, at least this 
line and a half that I read to you and we have in the record 
now, that is not correct? Is that what you are saying?
    Mr. Winokur. Well, Congressman, I believe I have tried to 
answer that question.
    Mr. Stupak. The controls that you all wanted to make sure 
that these SPEs worked, and that Enron would be back up and 
running, they don't work. Who is responsible?
    Mr. Winokur. Well, sir, the senior officials, the Chief 
Executive, the Chief Operating Officer, the Executive Vice 
Presidents, all of the people responsible----
    Mr. Stupak. Mr. Skilling, Mr. Lay, Mr. Buy, Mr. Causey.
    Mr. Winokur. Yes, sir.
    Mr. Stupak. Where is the Board's responsibility here?
    Mr. Winokur. Sir, the Board is responsible to, as I said in 
my opening statement, to direct, to set policy, to review 
strategic directions, oversee corporate policy, and to monitor. 
And were told by senior officials at many times--it is all I 
think laid out in the Powers report----
    Mr. Stupak. Page 3. A number of senior Enron officials we 
now know did not tell us the full truth. Page 3, middle of the 
page, who are these senior Enron employees we now know did not 
tell us the full truth? Who are they? This is your testimony.
    Mr. Winokur. Well, sir, the Board did not know that Mr. 
Kopper, Mr. Glisan, and others who participated in the Chewco 
and the Southhampton partnerships had taken actions that 
appeared to be adverse to Enron without getting code of conduct 
approval.
    Mr. Stupak. So when you say, ``A number of senior 
officials''--sorry, ``A number of senior Enron employees,'' you 
are only referring to Mr. Kopper and Mr. Glisan?
    Mr. Winokur. Well, I am referring to them as far as I do 
not believe, as we now know as the Powers Committee report 
says, that we got the full story of what was going on from 
others in the company.
    Mr. Stupak. Going back to my earlier question: did Mr. 
Skilling, then, give you all of the information that the Board 
requested when he reported to you, all of the relevant 
information you needed?
    Mr. Winokur. Well, I don't know that. I know that the 
Finance Committee did not receive full reports from Mr. Causey 
and Mr. Buy.
    Mr. Stupak. I am just taking here retrospect after the 
investigation these are your words. One page it said, ``Mr. 
Skilling reported to us he was discharging his obligations, and 
he did not do it.'' Page 3 you said, ``A number of senior Enron 
employees did not tell us the full truth.''
    Mr. Winokur. Sir----
    Mr. Stupak. So I am asking if Mr. Skilling, then, would be 
one of them.
    Mr. Winokur. In the Powers report, with respect, for 
example, to the Raptor restructure transaction in the spring of 
2001, I believe the report says that there were conflicting 
experiences or conflicting indications about the extent to 
which Mr. Skilling knew or didn't know about the Raptor 
restructure.
    Mr. Stupak. And he didn't tell the Board.
    Mr. Winokur. Well, the Board did not know at all about the 
Raptor restructure, to the best of my knowledge.
    Mr. Stupak. And Mr. Skilling never told you about it?
    Mr. Winokur. Well, the committee report says there was 
conflicting evidence as to whether he knew or not. But the 
Board never knew from anybody--Mr. Skilling, Mr. Causey, Mr. 
Buy, or anybody--about the Raptor restructure.
    Mr. Stupak. So see no evil, speak no evil, hear no evil, 
right?
    Mr. Winokur. I don't understand, sir.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Greenwood. Thank you.
    Mr. Skilling, let me touch on something that is sort of 
sad, and that is, of course, the suicide of Cliff Baxter. And 
you mentioned he was your best friend in your opening 
statement. And I am just wondering, before he died, did you 
have many conversations with him?
    Mr. Skilling. Yes.
    Mr. Greenwood. And in any of your conversations, did you 
have any indication what went wrong or why he was upset? Did he 
relate to you any of his concerns about anything that would 
explain what happened?
    Mr. Skilling. Yes.
    Mr. Greenwood. And were any of them relative to Enron?
    Mr. Skilling. Yes.
    Mr. Greenwood. And these that were relative to Enron, were 
they dealing with the financial condition of Enron?
    Mr. Skilling. No.
    Mr. Greenwood. Were they dealing with the conflicts in the 
partnerships?
    Mr. Skilling. No.
    Mr. Greenwood. Were they dealing with the management?
    Mr. Skilling. No.
    Mr. Greenwood. Were they all just personal, or were they 
business?
    Mr. Skilling. There were serious business and personal 
issues.
    Mr. Greenwood. In the serious business issues, were they 
dealing with Enron?
    Mr. Skilling. Yes.
    Mr. Greenwood. And without being indiscreet, is it possible 
you could give us just a brief explanation of what the serious 
business problems were that would create in his mind so much 
angst and concern that he took his life?
    Mr. Skilling. There is--I personally believe the----
    Mr. Greenwood. Can you pull the mike up just a little bit? 
I know it is a long day and you are coming to the end of this. 
I appreciate your help here.
    Mr. Skilling. Cliff's family has gone through a lot. I 
don't know if it is my job or my role to describe some of the 
things Cliff talked with me about. I would prefer leaving that 
to the family, if you could.
    Mr. Greenwood. I understand. That is why I say that if 
there is something that was relative to this hearing, to this 
investigation by this committee, that would help us understand 
what happened.
    Mr. Skilling. I don't think there is anyone that knew Cliff 
and spent time with Cliff toward the end that didn't realize--
and I don't think this is betraying any confidence with the 
family--there is no one that knew Cliff toward the end that 
didn't realize that he was heartbroken by what had happened.
    He believed that his reputation, my reputation, the 
reputation of the Board of Directors, reputation of Ken Lay, 
people that we had worked with for a long time, and his own 
personal reputation, were ruined by what had happened to the 
company and the treatment of what happened to the company by 
the press. And he was heartbroken by that.
    He believed, as I believed, that we had created a great 
company, that we were doing good things. And to have a lifetime 
of work denigrated as it was in the press was very painful to 
Cliff. And he--he is--I can tell one other--Carol, if you are 
out there, I hope you are okay with this. Carol, his wife, is a 
very private person. He told this story to a number of people, 
so I don't believe I am--I mean, you will get the story sooner 
or later, but Cliff was a very articulate individual. He was a 
fine man.
    And Cliff came over to my house a week before he took his 
life, maybe a week and a half before he took his life, and we 
spent an hour--almost 3 hours talking. And Cliff summed it up, 
he was very angry about the plaintiff's lawyers and they were 
coming after him. He was very angry about that, because he had 
spent a lifetime building security for his family.
    But he said, ``Jeff, the thing that really gets me''--he 
said, ``It is like this.'' He said it is like it is a beautiful 
day in Houston, Texas, and you are out in your front yard, you 
have got a hose, and it has got a nozzle on it, and you are 
watering your front lawn. And it is a beautiful day and all of 
the kids in the neighborhood are out. Your neighbors are out 
drinking coffee. They are all talking to one another. And it is 
just a great day.
    And then, suddenly the guy that lives next door to you 
comes crashing out of his front door. He walks up to you and 
says in a voice loud enough for everyone to hear that ``I hear 
you are a child molester.'' And then he turns around and he 
walks back inside his house and closes the door. And Cliff 
said, you know, from that day forward your life is changed. And 
he said, ``They are calling us child molesters.'' He says, 
``That will never wash off.''
    Mr. Greenwood. But, Mr. Skilling, you don't believe that.
    Mr. Skilling. I don't believe what?
    Mr. Greenwood. You don't believe that the press and 
everybody calling Cliff Baxter or yourself or anybody on the 
Board of Directors--denigrating or tainting you, you don't 
think it is accurate. That is what you are saying here today, 
that you are standing up here saying everything the press is 
saying, everything that Sherron Watkins is saying, all of the 
testimony you have had before you, including the dean of the 
law school, the University of Texas, all of that is wrong is 
what you are saying to us here today.
    Mr. Skilling. I will not say that. I have read everything I 
can read, every press account I can read over the last 4 
months, for the specific meetings or representations that the 
press has made that I was intimately familiar with, where I was 
there. I would say the press is getting it right maybe one-
third of the time, and the other two-thirds of the time they 
are just totally, totally off base.
    Mr. Greenwood. And the Special Committee report, that the 
Board of Directors, that the dean of the law school of the 
University of Texas, is off base, in your opinion.
    Mr. Skilling. I can only comment on what I know. To the 
extent that that report in any way says I did something that 
was not in the interest of the shareholders of Enron 
Corporation, then, yes, I disagree with those passages in the 
report vehemently. I did not do anything that was not in the 
interest, in all of the time that I worked for Enron 
Corporation, that was in the interest of the shareholders of 
the company.
    Mr. Greenwood. Mr. Skilling, I am not an attorney, but you 
are practicing plausible deniability, which is a term you are 
using to deny all what people have said. Sherron Watkins said 
Cliff Baxter complained mightily to you and all who would 
listen about the inappropriateness of these transactions with 
LJM. Jeff McMahon did the same thing. You have Cliff Baxter. 
You have Jeff McMahon.
    Mr. Skilling. I related----
    Mr. Greenwood. You have Sherron Watkins. There are three 
people who have said that you were told specifically all about 
these transactions, the conflict of interest. In fact, Jeff 
McMahon laid out five steps to you on how he thought that it 
should be corrected, because of all of the conflict of 
interest, inherent conflict of interest.
    So are you asking me to forget----
    Mr. Skilling. Congressman, you are flat out misreading--
misreading----
    Mr. Greenwood. I am reading right from Sherron Watkins' 
letter. Cliff Baxter complained mightily to Skilling and all 
who would listen about the inappropriateness of these 
transactions. Are you saying Sherron----
    Mr. Skilling. When you give me time----
    Mr. Greenwood. --Watkins is not telling the truth? Are you 
telling me that today?
    Mr. Skilling. Will you give me time----
    Mr. Greenwood. Just yes or no. Is Sherron Watkins telling 
the truth?
    Mr. Skilling. Can you give me time to specifically go 
through--this is serious stuff, sir.
    Mr. Greenwood. It is serious stuff, but I am just asking 
whether she----
    Mr. Skilling. This is very serious stuff.
    Mr. Greenwood. [continuing] whether Sherron Watkins' letter 
is truthful or not.
    Mr. Skilling. The discussion that I had with you about what 
Cliff Baxter said to me related to a time subsequent to me 
leaving the company. Did Cliff Baxter raise an issue about LJM? 
Cliff Baxter raised an issue with me probably in January or 
February of last year, to my best recollection. Cliff said, ``I 
don't know anything about the transaction,'' because he would 
have no basis for knowing about the transaction. But he said he 
and Andy were not--they had a very strained personal 
relationship, and he says, ``I don't think you ought to be 
doing anything for Andy Fastow.'' That was the sum total of our 
discussion about it.
    And then Cliff, I think subsequent to that, was open with 
people that he did not particularly like any investment vehicle 
that Andy would have a personal interest in.
    Mr. Greenwood. So Sherron Watkins, what she is saying here 
is not truthful?
    Mr. Skilling. If Sherron Watkins says that Cliff complained 
mightily, as I think she said, to anyone who would listen, I 
would say that is probably true. If you are asking when Cliff 
Baxter and I discussed the situation, I have a very clear 
recollection that Cliff said--and, in fact, I even asked him. 
It is my recollection I asked him, ``Do you think there is 
anything wrong with the structure in place?'' And his answer to 
me was, ``I don't know what the structure in place is.''
    I said, ``Do you have any reason to think that there is 
anything bad going on?'' He said, ``No.'' He said, ``I think it 
looks bad to have a related party transaction.'' Period. And 
that was the last discussion that we had about it.
    Mr. Greenwood. Mr. Skilling, I am going to give you the 
last word. My time has expired.
    Ms. DeGette?
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Winokur, you have three degrees from Harvard. You have 
been Chairman and Chief Executive Officer of an investment 
firm, Capricorn Holdings, Inc. You have also been the managing 
general partner of three affiliated limited partnerships. 
Correct?
    Mr. Winokur. Congresswoman, yes, that is correct.
    Ms. DeGette. And so you are familiar with--well, let me ask 
you this. You are on the Enron Board. You have a fiduciary duty 
to Enron stockholders/shareholders as a member of that Board, 
do you not?
    Mr. Winokur. Yes, ma'am.
    Ms. DeGette. As do the senior management, like the CEO or 
COO, correct?
    Mr. Winokur. Yes.
    Ms. DeGette. And you also are aware that when you have a 
potential conflict of interest by a member of the senior 
management of the Board or of a company like Enron, for 
example, Mr. Fastow, that is a very serious potential conflict, 
is it not?
    Mr. Winokur. Yes, it is.
    Ms. DeGette. And, in fact, that is why in the Finance 
Committee which you chair--do you still chair that now, sir?
    Mr. Winokur. Yes, Congresswoman, I do.
    Ms. DeGette. Okay. There was lengthy discussion about Mr. 
Fastow's potential conflict of interest in the LJM funds, 
correct?
    Mr. Winokur. Yes.
    Ms. DeGette. And why the Finance Committee and the Board 
felt that it was important to put a set of controls in place, 
so that Mr. Fastow's dual roles would be disclosed--and I 
assume any other officers or employees of the corporation, 
correct? Those would be disclosed and----
    Mr. Winokur. Yes.
    Ms. DeGette. [continuing] there would be firewalls 
insured----
    Mr. Winokur. Yes.
    Ms. DeGette. [continuing] to make sure that those 
individuals' fiduciary duties would be preserved, correct?
    Mr. Winokur. Yes.
    Ms. DeGette. And that is all laid out in Tab 8. You don't 
have to look at it, but it is those meetings we have been 
talking about from October 6, 2000, right?
    Mr. Winokur. Yes.
    Ms. DeGette. So you and all of the other Board members were 
aware of the potential conflict that Mr. Fastow had, correct?
    Mr. Winokur. Yes.
    Ms. DeGette. And, Dr. Jaedicke, you also knew of the 
potential conflict, did you not?
    Mr. Jaedicke. Of Mr. Fastow?
    Ms. DeGette. Of Mr. Fastow.
    Mr. Jaedicke. In the----
    Ms. DeGette. Or anyone else who would have an interest in--
--
    Mr. Winokur. No, Congresswoman, we didn't--I didn't know of 
any other person who was conflicted--who is in this conflict 
person but Mr. Fastow.
    Ms. DeGette. But what you thought you would do is put 
controls into place----
    Mr. Winokur. Yes.
    Ms. DeGette. [continuing] so if there was anyone like that 
you would know about it and make sure that the controls were 
followed, right?
    Mr. Winokur. That is correct.
    Ms. DeGette. Because that is your duty as a Board member, 
isn't it?
    Mr. Winokur. That is correct.
    Ms. DeGette. Now, in your testimony today, your written 
testimony on page 6, you talk about this dash sheet. We have 
been talking about it at length today, right? That is the sheet 
that discloses the conflict, and all of these people are 
supposed to sign off, correct?
    Mr. Winokur. Congresswoman, the dash sheet, as Mr. Skilling 
said, applies to all capital investments.
    Ms. DeGette. Right.
    Mr. Winokur. There was a separate LJM approval sheet that 
was put in place--I don't know exactly when--but put in place 
during this same period of time, which was another not 
replacement but incremental sheet.
    Ms. DeGette. But you, as the Chairman of the Finance 
Committee, never saw those sheets, did you?
    Mr. Winokur. We saw dash sheets, but never the LJM approval 
sheets.
    Ms. DeGette. Did you see----
    Mr. Winokur. And we didn't see dash sheets that related to 
the LJM transactions, to the best of my knowledge.
    Ms. DeGette. Well, did you see the dash sheets that are 
included in Tab 26 here? Those relate to a variety of LJMs.
    Mr. Winokur. Congresswoman, we would----
    Ms. DeGette. Did you see those dash sheets?
    Mr. Winokur. I have no recollection of having seen these 
during the time in which they were done. I saw them during the 
context of the Special Committee report.
    Mr. Skilling. I am sorry. What tab were you talking about?
    Ms. DeGette. Exhibit 26.
    Mr. Skilling. These are not dash sheets.
    Mr. Winokur. These are LJM approval sheets.
    Ms. DeGette. I am sorry, the LJM approval sheets. I am 
sorry. The LJM approval sheets, have you seen those? Thank you, 
Mr. Skilling.
    Mr. Skilling. You are welcome.
    Mr. Winokur. No, I have not. I had not until I--the Special 
Committee----
    Ms. DeGette. You didn't see them at the time.
    Mr. Winokur. No.
    Ms. DeGette. Okay. But you felt that you didn't need to see 
those, correct?
    Mr. Winokur. I didn't feel that the Finance Committee 
needed to review them----
    Ms. DeGette. Because you felt, as the Finance Committee, 
that you would get assurances from the senior management----
    Mr. Winokur. The senior management----
    Ms. DeGette. [continuing] that the procedures were being 
followed, right?
    Mr. Winokur. Yes, ma'am.
    Ms. DeGette. What did you do to get that assurance if you 
didn't look at the paperwork?
    Mr. Winokur. We had presentations from the Chief Accounting 
Officer, the Chief Risk Officer, Mr. Skilling present. We had 
presentations from the Chief Financial Officer, then Mr. 
Fastow----
    Ms. DeGette. Were those presentations written 
presentations?
    Mr. Winokur. Well, there usually were three or four pages 
of slides--a slide format or handout.
    Ms. DeGette. And what did the slides say?
    Mr. Winokur. Well, I would have to refer to each meeting, 
but I recall that Mr. Causey told us at one meeting that all of 
the controls were being followed, and that they were all 
working effectively.
    Ms. DeGette. And so you, in your fiduciary duty as a member 
of the Board, thought that that was enough to ensure that 
this--that all of the controls were taken care of.
    Mr. Winokur. Congresswoman, that presentation had other 
senior officials of the company in attendance who didn't speak 
up and say otherwise. I also knew that----
    Ms. DeGette. So by silence, you thought that was assent, 
correct?
    Mr. Winokur. I believe that if somebody sitting there hears 
something that is not true, they should say something, 
absolutely.
    Ms. DeGette. And Mr. Skilling never spoke up and said 
anything?
    Mr. Winokur. Not to my recollection. I also knew that the 
Audit Committee would receive additional presentations from 
similar people, and from Arthur Andersen, about the controls.
    Ms. DeGette. Okay. Mr. Jaedicke, then----
    Mr. Jaedicke. Yes, ma'am.
    Ms. DeGette. [continuing] did you get additional 
presentations?
    Mr. Jaedicke. Our review was from slides or lists showing 
the transactions, usually categorized by what kind of 
transactions they are. We did not have the--we did not look at 
every--whatever they are called, deal approval sheets, the----
    Ms. DeGette. The LJM approval sheets.
    Mr. Jaedicke. [continuing] the LJM.
    Ms. DeGette. Well, let me ask you this. Did you ever see a 
slide that showed that in the LJM Cayman LP, which is the first 
sheet of Exhibit 26, the persons negotiating for Enron--Joe 
Defner, Tim Proffitt--persons negotiating for LJM--Michael 
Kopper, Greg Caudell--did you ever know that?
    Mr. Jaedicke. No, ma'am.
    Ms. DeGette. Did you know that Michael Kopper was involved 
in any of these----
    Mr. Jaedicke. No, ma'am.
    Ms. DeGette. So what, did they just show you some of the 
slides?
    Mr. Jaedicke. They did not show us the deal approval 
sheets. We have the control; it says no one is allowed to 
negotiate for Enron who reports to Mr. Fastow.
    Ms. DeGette. All right.
    Mr. Jaedicke. And then we have requirements like--they are 
listed here. The transaction must take place at arms length.
    Ms. DeGette. But it would be fair to say you told them 
that, but then you never actually got the information on every 
deal, correct?
    Mr. Jaedicke. We asked that--yes, we were assured that----
    Ms. DeGette. You did get the information on every deal?
    Mr. Jaedicke. No, no. I am sorry. I misunderstood you.
    Ms. DeGette. Okay.
    Mr. Jaedicke. We looked----
    Ms. DeGette. You told them, have the firewalls in place, 
but you did not actually have the information on every deal as 
the Audit Committee did.
    Mr. Jaedicke. Of every deal sheet?
    Ms. DeGette. Right.
    Mr. Jaedicke. No, ma'am, we did not.
    Ms. DeGette. Thank you.
    I just want to say one final thing, Mr. Chairman. Here is 
what I think has happened after the last week. I have been 
listening to all of this, and I think that everybody in the 
company knew Mr. Fastow had a conflict. I think that there were 
a whole lot of people paying attention every other place. You 
have a CEO who is an admitted controls freak. You have a Board 
that puts controls into place.
    In 1999, Mr. Skilling says, ``Well, I remember I looked at 
the controls, but I wasn't involved.'' In 2000, then, this 
fellow who says he is a controls freak says, ``Well, I don't 
remember the part that said I was supposed to sign off, because 
the lights were on and off,'' which by the way I find ironic 
for an energy company, but that is a different issue for a 
different day.
    And then you have a Board that says, ``Well, we told these 
guys to put controls in place. We don't really know what 
happened.'' To me, it is not so surprising that a ship with 
captains like this sank and sank big, and I will yield back the 
balance of my time.
    Mr. Greenwood. And I thank the gentlelady. The gentleman, 
Mr. Rush, is recognized.
    Mr. Rush. Thank you, Mr. Chairman.
    I want to return to a line of questioning that you engaged 
in, Mr. Chairman, but I don't want to get into it with the 
level of intensity that was prevalent in your questioning.
    And I just want to ask, Mr. Skilling, when you came here, 
part of your opening testimony was that you came voluntarily, 
and I commend you for that. And there are some others who--from 
Enron who have taken advantage of their Fifth Amendment 
provisions and they decided not to testify. You have testified 
voluntarily.
    You indicated that the reason, or at least one of the 
reasons that you came, was because of the tragedy concerning 
your friend, Mr. Baxter. And we have heard testimony to the 
fact that he complained mightily to you, and you said that it 
was subsequent to his resignation from Enron, is that right? Or 
subsequent--was it subsequent to his resignation?
    Mr. Skilling. No, it probably occurred, I am guessing, in 
maybe late 2000. So it would have been probably three or 4 
months before he left Enron.
    Mr. Rush. When did he leave?
    Mr. Skilling. He left, I believe, in March.
    Mr. Rush. In March of 2001?
    Mr. Skilling. 2001.
    Mr. Rush. And you left in?
    Mr. Skilling. August.
    Mr. Rush. August of 2001. Okay. And Mr. McMahon complained 
to you, according to the letter to Mr. Lay from Ms. Watkins--
Mr. McMahon complained to you mightily also. Is that correct?
    Mr. Skilling. Well, again, characterizations, as I have 
said, I would not use the term ``mightily'' with Cliff.
    Mr. Rush. But he complained to you.
    Mr. Skilling. He didn't complain. Cliff brought up the 
issue. I knew he and Andy had had a degree of animosity that 
was not insignificant. My discussion with Jeff McMahon was 
related to what I believe--my perception was a compensation 
issue, and I recall telling Mr. McMahon that if he did anything 
to support Enron's shareholders there was no compensation 
issue, because the name of the game here was to protect our 
shareholders.
    Mr. Rush. Was there anyone else who complained to you about 
the LJM transactions?
    Mr. Skilling. I don't recall.
    Mr. Rush. Let me ask you, you are represented by counsel 
here. You have counsel with you here?
    Mr. Skilling. Yes.
    Mr. Rush. Is there any reason for that?
    Mr. Skilling. I am sorry?
    Mr. Rush. What is the reason for having counsel here with 
you?
    Mr. Skilling. Well, I am not a lawyer. And I will tell you 
what, this is one of the most complex set of events I have ever 
gone through, and I, to be quite frank, am very, very happy to 
have someone that understands this working with me.
    Mr. Rush. Okay. Mr. Winokur, earlier testimony from Mr. 
Olson stated that every investment Enron made was unsuccessful, 
that the international power and water projects, the broadband, 
and the energy supply contracts, all of these were 
unsuccessful. And as a result, in Enron's last year before 
bankruptcy, a billion dollars--well, 70 percent of its earnings 
came from Raptor.
    And the Powers report, on page 24, said that the Finance 
Committee was on notice that LJM's transactions were 
contributing very large percentages of Enron's earnings. But 
the Finance Committee still didn't look at those transactions. 
Did that surprise you, when you found out about that?
    Mr. Winokur. Congressman, I was aware that the water 
business was not performing well, because I was also involved 
with Azurix. The Board took action with respect to Enron energy 
services and suggested to management that it be restructured. 
It was restructured. That was reported in March of 2001 in the 
10Q.
    I was not aware until the Special Committee report, because 
we received reports at the Board by division--divisional income 
before interest and taxes--that showed every division was 
performing well, and we saw those reports even at the October 
Board meeting of this year.
    The Raptor transaction did not actually come to my 
attention in the form that it later appeared during the Powers 
Committee report.
    Mr. Rush. Well, the Special Committee also reported that 
the LJM made money on every single deal it signed with Enron, 
even if Enron lost money. Wasn't that kind of strange? Did you 
find that strange also as a part of the--as the head of the 
Finance Committee?
    Mr. Winokur. Congressman, I didn't know that until the 
Powers Committee report. But I would say, as someone who deals 
in investments, I found that very unusual.
    Mr. Rush. Mr. Skilling, did you ever tell Mr. Fastow that 
he--that the investors would never lose money? Did you tell 
them that they would never lose money?
    Mr. Skilling. No. As I have said earlier, Andrew Fastow and 
I had absolutely no understanding of any sort, any nature, that 
suggested that the partnership would be guaranteed a rate of 
return.
    Mr. Rush. Thank you, Mr. Chairman. I yield back. I yield 
back, Mr. Chairman.
    Mr. Greenwood. I thank the gentleman. The gentleman from 
Massachusetts, Mr. Markey, is recognized.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Winokur, you were on the Powers Committee, and I see 
that on page 21 of the Powers report, that there is evidence 
from other employees that Mr. Skilling approved the March 2001 
restructuring of Raptor. And you say on page 121 of the report 
that senior Enron employees told you that Mr. Skilling was 
aware of the problems with Raptor, and ``was intensely 
interested in its resolution.''
    Your report says, again, on page 121 that, ``We are told 
that during the first quarter of 2001 Mr. Skilling said that 
fixing the Raptor's credit capacity problem was one of the 
company's highest priorities. When the Raptor's restructuring 
was accomplished, Skilling called one of the accountants who 
worked on the project to thank him personally. Skilling 
disputes that account.'' Can you identify the senior Enron 
employees, Mr. Winokur, who told you these things?
    Mr. Winokur. Sir, I believe Dean Powers testified--I have 
not read his testimony--but I did not attend the interviews of 
any of those people, and so I would not be in a position to 
tell you who exactly said what in those interviews.
    Mr. Markey. Did you find the testimony of those Enron 
employees credible?
    Mr. Winokur. I believe that the interviews, as presented to 
us by our legal counsel, seem credible, but I wasn't there.
    Mr. Markey. Whose account do you think is accurate, theirs 
or Mr. Skilling's?
    Mr. Winokur. Sir, I don't have any basis to speculate, 
other than to report what we heard from our counsel.
    Mr. Markey. You were on the Powers Commission, were you 
not?
    Mr. Winokur. Yes, sir.
    Mr. Markey. Yes. Just a continuation, Mr. Winokur, of the 
obvious attitude that the Board has toward these important 
matters.
    Mr. Skilling, were you involved in approving the March 2001 
Raptor restructuring?
    Mr. Skilling. Not to my recollection.
    Mr. Markey. Did you ever say during the first quarter of 
2001 that fixing Raptor's credit capacity problem was one of 
the company's highest priorities?
    Mr. Skilling. I do not recall saying that.
    Mr. Markey. Did you ever call one of the accountants 
working on the Raptor's restructuring to thank him for his 
role?
    Mr. Skilling. It is very possible that I called 
accountants. Any time a senior executive in the company thought 
that someone had gone to extraordinary efforts--for example, 
missing Christmas dinner or something----
    Mr. Markey. I am talking about on the Raptor's 
restructuring. Did you call a senior accountant on the Raptor's 
restructuring?
    Mr. Skilling. I don't recall, but it would be possible.
    Mr. Markey. You don't recall. It is possible. Now, by 
August 14, Sherron Watkins says in her memo that, ``The Raptor 
entities are technically bankrupt.'' Was she right or wrong?
    Mr. Skilling. I don't know.
    Mr. Markey. You don't know. The Powers Committee, on page 
122 of its report, says that, ``The potential impact of the 
problem and the chosen solution to Raptor's problems were of 
considerable consequence to the company in Skilling's first 
quarter as CEO.'' That is the first quarter of 2001. Do you 
agree with that statement?
    Mr. Skilling. No, I don't.
    Mr. Markey. You do not. Do you really expect us to believe 
that you had little knowledge or involvement in a transaction 
in March of 2001 that allowed Enron to avoid taking a $500 
million pre-tax charge against earnings?
    Mr. Skilling. Congressman, again, I don't know where that 
number came from. I will tell you that, if you think of the way 
we operated our business, we had electricity sales obligations 
on one side, electricity and natural gas--I am sorry, 
electricity and natural gas sales obligations on one side, 
electricity sales and natural gas purchase obligations on the 
other.
    The total amount of that on our balance sheet at year end 
was in excess of $30 billion, if you include all risk--what are 
called risk management assets, plus accounts receivable related 
to our core natural gas and electricity market.
    Mr. Markey. This is, however, Mr. Skilling----
    Mr. Skilling. To suggest----
    Mr. Markey. I understand that $30 billion is a big 
corporation. But what I am saying here is we have got $500 
million. Much of that is already something that is already in 
progress over the preceding 10 years. Now we are adding in 
something new. When you are adding something new on to 
something that is already there, you don't have to look at the 
old. You are looking at the new. You are the CEO. It is March 
of 2001.
    Mr. Skilling. Congressman, that is not the----
    Mr. Markey. You say----
    Mr. Skilling. That is not the way it works.
    Mr. Markey. Well, it----
    Mr. Skilling. What happened was prices for natural gas and 
electricity quadrupled in the last 6 months of the year 2000. 
So our risk management assets went from a number on the order 
of $6- or $7 billion up to close to $30 billion. So we had 
losses on one side of the portfolio of a significant amount, 
and we had gains on the other side of the portfolio of a 
significant amount.
    That was no different in concept from having gains that we 
had on stock purchases that high technology companies--had done 
very well at, and we had hedges on the other side of that. So 
to suggest that this, in the grand scheme of things, was 
something that I would have been lying awake at night sweating 
over is just not the case.
    Mr. Markey. A $500 million charge, which allowed for the 
maintenance of a myth that the company was profitable is no 
small number to be concerned with.
    Mr. Skilling. Our company was profitable. That is no myth.
    Mr. Markey. Well, the Powers report disputes that.
    Mr. Skilling. The Powers report----
    Mr. Markey. So doesn't all of the other surrounding 
evidence that this was a cascade--a corporation cascading 
downwards rapidly. All of the evidence--of course, you know, 
people say you live life forward and understand it backwards. 
But it is quite clear that--from the outside now, it is clear 
that it was already in a freefall.
    Now, you were the CEO at the time, and you are a self-
avowed--as you are right here today--a brilliant controls freak 
CEO. But what you have done today is invoke the Hogan's Heroes 
Sergeant Schultz defense of ``I see nothing; I hear nothing.'' 
You were basically in the final 6 months of your tenure as the 
CEO oblivious to all of the surrounding events which clearly 
were bringing to your attention the numbers, the circumstances, 
the concerns, which by August 14 made it quite clear that you 
weren't leaving because of personal reasons. You were leaving 
because this corporation was in a state of complete collapse, 
which had not yet come to the full attention of the public, 
investors, or employees of this corporation.
    Mr. Skilling. On the date I left the company, on August 14, 
2001, I had every reason to believe the company was financially 
stable. And you can say today that everybody agrees that there 
was a problem. I challenge that. I challenge that. Let us go 
ahead and go back and look at the numbers.
    Mr. Markey. Well, but, Mr. Winokur, where did the $500 
million figure in the Powers report come from? Where did it 
come from?
    Mr. Winokur. Sir, there were risk management reports 
provided regularly, I am told, to Mr. Causey and Mr. Buy that 
showed the Raptor negative position. And the action that was 
taken was to issue forwards on stock which did not come to the 
Board's attention, and those transactions apparently were 
recorded improperly because that led to the part of the $1.2 
billion reduction in shareholders' equity that was discussed on 
October 16, I think.
    Mr. Markey. Do you stand by the Powers report, Mr. Winokur?
    Mr. Winokur. Yes, sir, except for the part on the Board 
which I, in my statement, believe I have taken exception to, 
because I was not associated with it--with that section.
    Mr. Markey. I think Mr. Powers did a good job, Mr. Winokur. 
I think he did the job that the Board should have done, and I 
think they identified a problem that already existed inside of 
that company long before. And I think the CEO should have known 
about it.
    Mr. Chairman, I thank you for this great hearing. I think 
it was a very important public service you provided here today.
    Mr. Greenwood. Thank you, Mr. Markey.
    Mr. Markey. Ms. Jackson-Lee, if I might say----
    Mr. Greenwood. Yes, I understand.
    Mr. Markey. [continuing] wants to ask a couple of questions 
in writing for the panel, if that would be permissible.
    Mr. Greenwood. Under our procedures, only members of our 
committee can do that. But you may submit any questions----
    Mr. Markey. If I may submit----
    Mr. Greenwood. [continuing] on her behalf. You certainly 
may.
    In fact, let me make a couple of announcements as we wrap 
this hearing up. First of all, let me announce that the 
committee record will remain open for 30 days, and if either--
or any of you wish to submit additional testimony or 
clarifications for the record, as this was a record under oath, 
you may wish to do that once you have reviewed your testimony. 
We certainly welcome any clarifications, additions, or 
corrections for the record.
    We would also invite you to answer written questions as 
they may be submitted to you. I understand a number of members 
have suggested, including Mr. Markey, that he has some written 
questions for you. We would appreciate your response in 
writing, if possible.
    And, third, let me thank you for appearing and testifying. 
There was--obviously, I know this has not been pleasant or easy 
for you, any one of you, and I want you to know it is not 
pleasant or easy for us as well.
    I would much prefer our committee busy legislating on some 
important health care issues and technology issues and energy 
issues rather than doing this. But we, as Mr. Markey said, are 
trying to fulfill our national obligation to examine this, 
understand it, and perhaps help make sure it doesn't happen 
again to any other company or to any other group of citizens 
who have been so severely affected by it.
    Finally, let me also--before we finish, I understand Mr. 
Rush wants to ask one additional question. Let me let him do 
that, and then I want to get something for the good of the 
committee on the record before we finish as well. Mr. Rush?
    Mr. Rush. If I could just ask--have another minute and a 
half. I just wanted to ask each one of the panelists--we might 
not have this opportunity again. I just want to ask, in light 
of this--the situation that we are confronted with as a Nation 
and that Enron is confronted with, is there anything that you, 
with 20/20 hindsight, that if you could do differently to avoid 
this situation that you would do? And I will start with Mr. 
Winokur, and I would just ask each one of you to answer that 
question.
    Mr. Winokur. Congressman, I have thought extensively about 
that question since October. I believed in Enron. I never sold 
a share of stock. I had confidence in the management. I had 
confidence that we had the best consultants--Arthur Andersen 
and Vinson & Elkins--available to us. I believed we acted with 
good business judgment, reasonable business judgment. We 
understood the risks of the decisions. We set in place lots of 
controls.
    What I am deeply saddened by particularly is that it has 
become apparent from the Powers Committee report that there 
were many people inside the company and at Arthur Andersen and 
Vinson & Elkins who knew something was not right, and nobody, 
to the best of my knowledge, came forward to the Board of 
Directors until August of this year when, frankly, it was very 
late to do anything about it. And I feel terrible about that.
    Mr. Rush. Knew something was right or knew something was 
wrong?
    Mr. Winokur. I am sorry. Knew something was wrong, had 
intimations that something was wrong, and these are people who 
had contact in some cases with the Board on a regular basis. In 
some cases, they had contacts at Arthur Andersen and Vinson & 
Elkins, and not one person came to the Board and said, ``We are 
uneasy. We are uncomfortable. We think something could be done 
before it turned out to be too late.''
    Mr. Greenwood. Dr. Jaedicke?
    Mr. Rush. And I would like to just ask, what would you do 
differently, not what someone else would do differently.
    Mr. Jaedicke. Well, like my colleague, sir, I have thought 
a lot about it also. And it is hard for me to understand why 
none of the controls that we put into place, of which there 
were many, seemed to work. And even without making the judgment 
of people knew something was wrong and they didn't come forth, 
it is if they had simply been some indication that there was 
concern out there. But somehow that just did not surface. We 
were not made aware of that.
    There were a number of memoranda that we read about in the 
paper, such as the discussion among the Arthur Andersen 
partners about the risks in Enron, and then 3 or 4 days later 
we have an Audit Committee and we don't hear word one about any 
of those concerns. I don't know why.
    So like my colleague, I am disappointed that somehow all of 
the effort we put in and all of the controls we put in place, 
and all of the assurances that we had that those controls were 
adequate and were, in fact, working and our policies were being 
complied with, turned out not to be the case, at least 
according to the Powers report.
    I don't know why. I can only tell you that they didn't. And 
as an Audit Committee chairman that took pride in the work of 
the committee, as well as had, as my colleague said, very 
strong feelings for the company--I believed in it--I, too, did 
really not sell shares except to exercise some options that 
were expiring. I accumulated shares, I think, during this year. 
I cared about this company. I cared about my position on the 
Board, and I cared about my reputation. And so I, too, have 
great regrets.
    Mr. Rush. So there isn't anything that you would do 
differently, in other words? Is there anything--I am trying to 
find out, is there anything that you--that the three of you 
would do differently in order to avoid the situation if--you 
know, if you were confronted with a similar situation in the 
future?
    And, Mr. Skilling, maybe you can answer that. What would 
you do differently?
    Mr. Skilling. I will echo Mr. Winokur's comments and Mr. 
Jaedicke's comments. And I guess I would also say that I think 
we all will have a better picture 2 months from now after we 
have gotten more of the facts about what really did happen, 
that there may be some mechanical things that can be done that 
could be helpful for the system, mechanical things, systemic 
issues. But I just don't know at this point that we have the 
facts of what happened. I wasn't there when it all came 
unstuck.
    Mr. Rush. Thank you, Mr. Chairman.
    Mr. Greenwood. I thank my friend. I should add for his 
purpose, too, that we are going through the same exercise. What 
could we have done different, in terms of our rules and 
procedures? We are going to look very hard next week at the 
accounting standards, and we are going to look hard at the 
issues of the energy markets, and this whole situation by which 
these trading organizations were created and operate, examine 
them to make sure that they are working in the national 
interest as well.
    We have got a lot of work to do there. In that regard, 
first of all, Mr. Skilling, let me on behalf of the committee 
express to you our condolences on the loss of your friend Mr. 
Baxter. I know that it was hard for you to talk about it today. 
I want you to know we sympathize with him and his family as 
well. And we extend our condolences to them.
    Before we conclude, however, I would like, Mr. Jaedicke and 
Mr. Winokur, for you to give us, on behalf of the entire 
committee and our bipartisan investigative staff, some idea 
about what you know of the shredding that is going on or has 
gone on at Enron. Can you tell us anything about that 
shredding, who has authorized it and what does it consist of?
    Mr. Winokur. Congressman, I know nothing about it, other 
than what I have seen on television or read in the newspaper.
    Mr. Greenwood. Dr. Jaedicke?
    Mr. Jaedicke. Sir, the only thing I can tell you is that 
probably the last notice that was sent out was sent out at 
least partially at the request of the Audit Committee when we 
heard and read about the Arthur Andersen matter. The only thing 
I can tell you is I called a company and asked that another----
    Mr. Greenwood. Is the company Shredco, Inc.?
    Mr. Jaedicke. No, Enron--I am sorry--and asked that another 
reminder be sent out. That was even before Enron was----
    Mr. Greenwood. A reminder not to get rid of documents?
    Mr. Jaedicke. Pardon me?
    Mr. Greenwood. Was it a reminder not to get rid of 
documents?
    Mr. Jaedicke. Exactly right, yes. I asked if there had been 
steps taken to preserve the documents, to preserve any 
documents. They said yes, there were several e-mails that went 
out. I think they were e-mails. Several notifications that went 
out.
    I asked them what the date was that they started, and they 
gave me the date. I am just reporting to you my only knowledge 
of this.
    Mr. Greenwood. Yes.
    Mr. Jaedicke. They gave me the date that they had started. 
I suggested that they send out one more at least.
    Mr. Greenwood. We received reports, as did I think 
Americans generally, that shredding was going on in January, 
that a company called Shredco had been hired to do extensive 
shredding, and that this was going on in spite of the fact that 
the FBI, SEC, everybody else is investigating. Can you tell us 
whether you think that is true?
    Mr. Jaedicke. Sir, I have no knowledge of that at all. I am 
reporting to you that the only thing I did was to try to get 
another--or not try to but ask that another notice be sent out. 
I am not aware----
    Mr. Greenwood. Well, our investigators will obviously want 
to examine that issue more thoroughly with you and others with 
the Board. If you can, obviously, gather information for us, we 
would certainly appreciate it. One of the things that obviously 
we cannot tolerate, either with Arthur Andersen or with 
officials at Enron, is the destruction of documents pertinent 
to this investigation.
    And we intend to be very diligent about finding out what 
happened there and who might be responsible for it and what 
might have been destroyed, if anything was destroyed.
    Second, while you are all here without subpoena--and I 
thank you for coming voluntarily and for testifying--the 
committee obviously reserves the right to continue forward with 
possible other visits or interviews or perhaps even a request 
for you to return, if necessary, to come and testify. I can 
give you the general outline of where we go from here.
    Our investigators are still at work trying to uncover what 
is still yet to be uncovered in terms of documentary evidence 
as to what occurred and how it occurred and when it occurred 
and who knew it was going on. We are still trying to learn 
whether the rules were broken or whether the rules themselves 
were broken and ought to get fixed.
    In that regard, we are holding two hearings next week, one 
by the Subcommittee on Commerce, Trade, and Consumer 
Protection, Mr. Cliff Stearns chairs, which will look at the 
issues of accounting which were seriously challenged in this 
collapse, and to see whether or not we have some work to do in 
terms of stiffening those rules or improving the enforcement of 
those rules.
    We will also look at the energy markets. One of the good 
news stories out of all of this mess is that somehow the energy 
markets kept working. Electricity and gas kept being delivered 
at prices consumers could afford, and there was no real rocking 
or shaking or dislocation of that marketplace in spite of this 
tremendous collapse. That is a good news story.
    We need to understand why that good news happened in spite 
of all of this massive collapse, and we will take a look at 
that, because we are still trying to figure out some good 
electric policy for this country and what makes sense for the 
future.
    And the O&I Committee will be announcing very shortly a 
series of additional hearings. We intend before the end of 
February to bring the head of the Arthur Andersen firm before 
the committee, and to subpoena, if necessary, the appearance of 
Mr. Ken Lay to give us a view of what might have occurred from 
the top of the corporation, and to help us understand the final 
parts of this puzzle.
    I have asked all of the subcommittees involved, to work at 
diligent speed, so that we can as quickly as possible turn the 
corner and start working on solutions. To that end, let me make 
a request of you. You have seen this thing from the inside.
    If you think you can make some suggestions to us as to how 
we can make sure that boards of directors are better equipped 
to handle these kinds of situations, and that information flows 
more thoroughly, more transparently to consumers and investors, 
so that the system works better and confidence is restored in 
this marketplace as quickly as possible, we need your help.
    We thank you for coming voluntarily today. We appreciate 
your testimony. And the hearing will stand adjourned, with the 
notion that we have 30 more days to receive testimony.
    The hearing is adjourned.
    [Whereupon, at 6:08 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
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