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



 
                THE FINANCIAL COLLAPSE OF ENRON--Part 4
=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                             MARCH 14, 2002
                               __________

                           Serial No. 107-90
                               __________

       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
RICHARD BURR, North Carolina         BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
GREG GANSKE, Iowa                    BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING,          GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                  THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                 BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland     LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
-- -- (Vacancy)

                  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
RICHARD BURR, North Carolina         DIANA DeGETTE, Colorado
ED WHITFIELD, Kentucky               CHRISTOPHER JOHN, Louisiana
  Vice Chairman                      BOBBY L. RUSH, Illinois
CHARLES F. BASS, New Hampshire       JOHN D. DINGELL, Michigan,
-- -- (Vacancy)                        (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)






                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Astin, Ronald T., Partner, Vinson & Elkins, L.L.P............    15
    Derrick, James V., Jr., Former General Counsel, Enron 
      Corporation................................................    16
    Dilg, Joseph C., Managing Partner, Vinson & Elkins, L.L.P....    19
    Rogers, Rex R., Vice President and Associate General Counsel, 
      Enron Corporation..........................................    15
    Sefton, Scott M., former General Counsel, Enron Global 
      Finance, Enron Corporation.................................    15
    St. Clair, Carol L., former Assistant General Counsel, ECT 
      Resources Group, Enron Corporation.........................    22

                                 (iii)

  






 FINANCIAL COLLAPSE OF ENRON CORPORATION, WITH FOCUS ON ENRON'S INSIDE 
                          AND OUTSIDE COUNSEL

                              ----------                              


                        THURSDAY, MARCH 14, 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, Stearns, Burr, 
Whitfield, Bass, Tauzin (ex officio), Deutsch, Stupak, 
Strickland, DeGette, and Dingell (ex officio).
    Also present: Representatives Markey, Green, and Waxman.
    Staff present: Tom Dilenge, majority counsel; Mark 
Paoletta, majority counsel; Brendan Williams, legislative 
clerk; Mike Geffroy, majority counsel; Will Carty, legislative 
clerk; Peter Kielty, legislative clerk; Shannon Vildostegui, 
majority counsel; David Cavicke, majority counsel; Brian 
McCullough, majority professional staff; Edith Holleman, 
minority counsel; Consuela Washington, minority counsel; Chris 
Knauer, minority investigator; and Jonathan Cordone, minority 
counsel.
    Mr. Greenwood. The hearing will come to order.
    Witnesses may be seated at the table. Good morning and 
welcome to the Subcommittee on Oversight and Investigations' 
ongoing inquiry into the financial collapse of the Enron 
Corporation.
    Today we are going to examine elements of Enron's structure 
of corporate governance. The words ``corporate governance'' 
describe the entire architecture of how a modern corporation is 
managed on behalf of its investors and stockholders, its 
customers, and its employees.
    This encompasses executives at every level, corporate 
accounting teams, corporate counsel, senior managers, and the 
Board of Directors. It also includes the outside expert advice, 
often consultants, attorneys, and accountants, that senior 
management, the Board of Directors, or the Audit Committee of 
the Board retained to provide advice on a wide array of issues. 
These issues ranged from human resources to tax analyses to 
producing an audited financial statement.
    Up to this point, our work has focused primarily on what 
went wrong at Enron. Through our work we have been able to cast 
a considerable amount of light on the people and transactions 
behind this company's unparalleled failure. As a result of this 
effort, we have been able to slowly parse the complex of self-
dealing transactions that contributed to Enron's dramatic 
descent into bankruptcy.
    We have also acquired a more complete understanding of how 
these highly irregular transactions were cloaked behind a 
curtain of nearly impenetrable financial arrangements. We know 
much more, too, about the individuals who devised and 
implemented these schemes.
    And it becomes increasingly clear that the collapse of 
Enron, which was greeted with such surprise by investors, 
shareholders, customers, analysts, and employees alike, was 
more than mere happenstance. Instead, a complex infrastructure 
of ill-defined partnerships, hedges, collars, and various other 
off-the-books transactions were purposefully designed to 
mislead shareholders about Enron's precarious financial 
position.
    Phantom assets and phantom earnings were created in order 
to create phantom wealth. Sadly, the investors and employees 
who risked their fortunes and their futures were very real, and 
they suffered very real losses.
    Among the many mysteries yet surrounding this collapse, one 
in particular has emerged. What role, whether by omission, 
commission, did Enron's corporate governance team play in the 
slide into bankruptcy and the increasing reliance on riskier 
and riskier transactions to keep Enron afloat?
    It is especially important to undertake this examination, 
since we now know that many of the seeds of this particular 
financial tragedy were sewn years ago. How is it, then, that 
the Board of Directors and senior management failed to red flag 
flagrant issues of conflict of interest and highly questionable 
transactions behind several key partnerships, such as the 
Chewco deal and the various LJM associated transactions?
    What we have discovered to date amounts to a systemic 
failure on the part of Enron's legal and accounting personnel, 
as well as outside counsel and accountants, both to discover 
these problems and to warn of their dangers. Clearly, no 
actions were taken to prevent the ensuing disaster.
    A few courageous individuals attempted to raise the alarm, 
but either their warnings came too late or too half-heartedly. 
Or perhaps the right people didn't hear the alarms.
    This disserving situation brings us to the question at hand 
today. Where were the faithful stewards of Enron? In 
particular, where were the people whose fiduciary duty it was 
to guard against hidden dangers and to protect the interests of 
Enron and its shareholders? Where were the professionals whose 
job it was to ferret out wrongdoing and guard against 
malfeasance? What, if any, actions did they either take or 
recommend to put an end to those irresponsible actions which 
eventually led to Enron's demise?
    This phase of our hearing involves the people who were paid 
to have known better, and who should have done more, much more, 
the accountants and lawyers. Next week we will have a chance to 
hear from the accountants. This morning we have before us the 
attorneys, Enron's inside and outside counsel.
    I look forward to this opportunity to listen to their 
testimony about a wide array of issues, particularly their 
actions and advice surrounding the many dubious related party 
transactions. For example, I'd like to get a clearer 
understanding of the attorneys' assessments and advice on the 
thorny ethical problems surrounding the two LJM partnerships 
which did business with Enron, even though these partnerships 
created a clear conflict of interest with Enron's former CFO 
Andy Fastow, who succeeded in having a financial stake on both 
sides of the transactions.
    I would like to know why legal counsel worked so hard to 
minimize what Mr. Fastow disclosed about his financial 
arrangements with the partnerships in proxy filings. Was his 
comfort level about disclosure more compelling than the 
interests of Enron and its shareholders in ensuring that he 
wasn't benefiting improperly at their expense?
    I would like to learn about the attorney's role and advice 
in the formation and evidence of the LJM Enron transaction 
approval process. It was this document that was supposed to 
manage the inevitable conflicts arising out of such a curious 
arrangement and ensure the fairness of these transactions to 
Enron and its shareholders.
    Why did it take so long for the lawyers to catch inherent 
weaknesses in the process? And why weren't these corrected in a 
timely manner?
    I also want to know why no one seemed to be monitoring the 
actions of senior Enron employees working on behalf of outside 
interests, and why the LJM2 private placement memorandum, in 
which Mr. Fastow and other Enron employees were marketing their 
access to inside information, failed to raise any red flags to 
those responsible for looking out for Enron's interests?
    We are not looking at 1 or 2 missteps here, but a pattern 
of behavior characterized by neglect and avoidance by Enron's 
legal advisors. We will also look at the series of decisions 
and actions following Sherron Watkins' letter to Kenneth Lay. 
Who made the decision that the investigation of her serious 
allegations by Enron's outside counsel, Vinson & Elkins, should 
be so limited, and on whose advice?
    We have a lot of ground to cover, so let me thank the 
witnesses who have come today. You all have been responsive to 
our requests for interviews, and we appreciate that. We also 
appreciate that you have come here voluntarily to try to help 
us understand your role in these matters. We thank you again.
    I will now recognize the ranking member, the gentleman from 
Florida, Mr. Deutsch.
    [The prepared statement of Hon. James C. Greenwood 
follows:]
 Prepared Statement of Hon. James C. Greenwood, Chairman, Subcommittee 
                    on Oversight and Investigations
    Good morning, and welcome to the Subcommittee on Oversight and 
Investigations' ongoing inquiry into the financial collapse of the 
Enron Corporation. Today, we are going to examine elements of Enron's 
structure of ``Corporate Governance''. The words Corporate Governance 
describe the entire architecture of how a modern corporation is managed 
on behalf of its investors and stockholders, its customers and its 
employees.
    This encompasses executives at every level, corporate accounting 
teams, corporate counsel, senior managers and the Board of Directors. 
It also includes the outside expert advice, often consultants, 
attorneys and accountants, that senior management, the Board of 
Directors or the Audit Committee of the Board, retain to provide advice 
on a wide array of issues.These issues range from human resources to 
tax analyses, to producing an audited financial statement.
    Up to this point, our work has focused primarily on what went wrong 
at Enron. Through our work, we have been able to cast a considerable 
amount of light on the people and transactions behind this company's 
unparalleled failure.
    As a result of this effort, we have been able to slowly parse the 
complex web of self-dealing transactions that contributed to Enron's 
dramatic decent into bankruptcy.
    We have also acquired a more complete understanding of how these 
highly irregular transactions were cloaked behind a curtain of nearly 
impenetrable financial arrangements. We know much more too about the 
individuals who devised and implemented these schemes.
    And it becomes increasingly clear that the collapse of Enron, which 
was greeted with such surprise by investors, shareholders, customers, 
analysts and employees alike, was more than mere happenstance. Instead 
a complex infrastructure of ill-defined partnerships, hedges, collars, 
and various other off-the-books transactions were purposefully designed 
to mislead shareholders about Enron's precarious financial position. 
Phantom assets and phantom earnings were created out of whole cloth in 
order to create phantom wealth. Sadly, the investors and employees who 
risked their fortunes and their futures were very real and they 
suffered real losses.
    Among the many mysteries yet surrounding this collapse, one in 
particular has emerged. What role, whether by omission or commission, 
did Enron's corporate governance team play in the slide into bankruptcy 
and the increasing reliance on riskier and riskier transactions to keep 
Enron afloat?
    It is especially important to undertake this examination, since we 
now know that many of the seeds of this particular financial tragedy 
were sewn years ago. How is it then that the Board of Directors and 
senior management failed to red flag flagrant issues of conflict of 
interest and highly questionable transactions behind several key 
partnerships--such as the Chewco deal and the various LJM-associated 
transactions?
    What we have discovered to date amounts to a systemic failure on 
the part of Enron's legal and accounting personnel, as well as outside 
counsel and accountants, both to discover these problems and to warn of 
their dangers. Clearly no actions were taken to prevent the ensuing 
disaster.
    A few courageous individuals attempted to raise the alarm, but 
either their warnings came too late or too half-heartedly. Or perhaps 
the right people didn't hear the alarm. This disturbing situation 
brings us to the question at hand today:
    Where were the faithful stewards of Enron? In particular, where 
were the people whose fiduciary duty it was to guard against hidden 
dangers and to protect the interests of Enron and its shareholders? 
Where were the professionals whose job it was to ferret out wrongdoing 
and guard against malfeasance? What, if any actions did they either 
take or recommend to put and end to those irresponsible actions which 
eventually led to Enron's crack-up?
    This phase of our hearing involves the people who were paid to have 
known better, and who should have done more . . . much more--the 
accountants and the lawyers. Next week we'll have a chance to hear from 
the accountants. This morning, we have before us the attorneys--Enron's 
inside and outside counsel.
    I look forward to this opportunity to listen to their testimony 
about a wide array of issues, particularly their actions and advice 
surrounding the many dubious ``related party transactions''.
    For example, I would like to get a clearer understanding of the 
attorneys' assessment and advice on the thorny ethical problems 
surrounding the two LJM partnerships, which did business with Enron 
even though these partnerships created a clear conflict of interest 
with Enron's former CFO Andy Fastow . . . who succeeded in having a 
financial stake on both sides of the transactions.
    I would like to know why legal counsel worked so hard to minimize 
what Mr. Fastow disclosed about his financial arrangements with the 
partnerships in proxy filings.
    Was his comfort-level about disclosure more compelling than the 
interests of Enron and its shareholders in ensuring that he wasn't 
benefiting improperly at their expense?
    I would like to learn about the attorneys' role and advice in the 
formation and evolution of the LJM-Enron transaction approval 
process.it was this process that was supposed to manage the inevitable 
conflicts arising out of such a curious arrangement and ensure the 
fairness of these transactions to Enron and its shareholders. Why did 
it take so long for the lawyers to catch inherent weaknesses in the 
process? And why weren't these corrected in a timely manner?
    I also want to know why no one seemed to be monitoring the actions 
of senior Enron employees working on behalf of outside interests. And 
why the LJM2 private placement memorandum--in which Mr. Fastow and 
other Enron employees were marketing their access to insider 
information--failed to raise any red flags to those responsible for 
looking out for Enron's interests?
    We are not looking at one or two missteps here, but a pattern of 
behavior characterized by neglect and avoidance by Enron's legal 
advisors.
    We'll also look at the series of decisions and actions following 
Sherron Watkin's letter to Kenneth Lay. Who made the decision that the 
investigation of her serious allegations by Enron's outside counsel, 
Vinson & Elkins, should be so limited? And on whose advice?
    We've got a lot of ground to cover. So let me thank the witnesses 
who have come today. You all have been responsive to our requests for 
interviews and we appreciate that. We also appreciate that you have 
come here voluntarily to try to help us understand your role in these 
matters. Thank you again.
    I will now recognize the Ranking Member.

    Mr. Deutsch. Thank you, Mr. Chairman. And the reason I 
asked staff to put up this chart is this is a chart that we 
showed at the hearing with the Enron executives of one of the 
4,000 partnerships. And we have looked inside of the 
partnership at this point in time, and I guess I feel 
comfortable saying that at least this partnership was illegal, 
because if we look inside of the partnership it did not have a 
business purpose.
    And we can get into the details at a later date, but my 
understanding is that at least the structure of the partnership 
was approved by Mr. Derrick and by Mr. Astin. And I guess in 
the questioning, I guess I am going to ask you direct questions 
about if we now know, or at least you can disagree with my 
assessment, that the partnership itself was a violation of 
security laws. The structure might not have been, but inside, 
why did, you know, as attorneys representing a client and 
representing your company, did we miss that?
    And since my understanding is the structure of the 
partnerships were not that much different, and we know that 
some--at least several of the others that we have been able to 
understand and really delve into, also did not have business 
purposes. Why did that occur?
    So I yield back the balance of my time and look forward to 
questions.
    Mr. Greenwood. The Chair thanks the gentleman from Florida 
and recognizes the Chairman of the full committee, the 
gentleman from Louisiana, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman. And let me 
commend you again for doing such a thorough job throughout this 
process, and for the great assistance the minority has provided 
and partnership in which this investigation has occurred.
    This subcommittee's task has been to investigate the 
reasons behind the sad tale of Enron's collapse, so that the 
full committee can understand what went wrong, so that our 
committee and our committees of Congress might address, 
legislatively if necessary, some of these problems.
    Only by accurately identifying the basic problems can we 
accurately identify an appropriate remedy. I believe we have 
gone a long way toward this goal, but we have more to learn. 
And we have been able to begin exploring remedies because of 
the subcommittee's good and instructive work, and I want to 
thank you for that.
    This morning we turn, of course, to the attorneys in the 
equation, the people whose duty it was to protect the legal 
interest of Enron and its shareholders, and I look forward to 
hearing what they have to say for themselves.
    Last month when we had Sherron Watkins before us I pointed 
out a legal doctrine known as the Doctrine of Last Clear 
Chance. It holds that basically, even if you are totally in the 
right on the highway, if you had the last clear chance to avoid 
a crash, you could be responsible for what happened if you 
didn't exercise the last clear chance to avoid that accident.
    Indeed, Sherron Watkins offered Enron's leadership a last 
clear chance to avoid the crash, not to avoid a total loss, not 
to avoid damage, but to avoid potentially a total crash. And 
what strikes me today about her action as a loyal employee was 
that Sherron Watkins was not an attorney. She did the right 
thing, I think, but she did something that was technically not 
her job, something that might more directly be associated with 
the legal team, counsel's office. Vinson & Elkins' team was 
responsible, basically, for helping Enron make the right legal 
choices.
    I think, in some respects, the folks who literally had that 
responsibility and who could have helped avoid the last clear 
chance, and, therefore, this accident, are with us today, and 
we intend to learn as much as we can about what went wrong. Why 
didn't this team and the counsel's office at Enron see these 
problems as clearly as a non-attorney, Sherron Watkins, did?
    Well, it is clear from my investigations that others in the 
company, particularly the Board of Directors, either relied 
upon the supervision of the legal team and the accounting firm, 
as Mr. Skilling claims to have done, or they are hiding behind 
that assertion to hide the problems of their own failure to 
supervise the conduct of some of their employees.
    I understand that arrangements of duties and functions 
among attorneys are complex. I am an attorney myself, and I 
understand those complexities. Responsibilities, in fact, at 
Enron were divided, and I know that Enron was a huge and a 
complicated operation, so I want to hear your sides of the 
story as carefully as we can, and to understand it as carefully 
as we can.
    But we want to hear about the LJM transactions, the 
approval processes, which were meant to prevent the CFO from 
taking advantage of the company and its shareholders. All of 
these controls the Board told us about, you were asked to 
examine, when, in fact, Mr. Lay's attention was brought to 
these problems, and he asked for assistance from his counsel's 
office and eventually from the legal team who were hired to 
protect the company.
    I want to know why the outside counsel, the duty to make 
sure these extremely complex transactions would not put Enron 
at risk, eventually signed off on it and ended up providing 
legal cover for what would turn out to be a very destructive 
transaction--set of transactions.
    I want to know why when Mr. Lay was advised by Ms. Watkins 
that the company was about to implode, that individuals had 
breached their fiduciary duty and were investors, and had 
breached their ethical duty and were crossing the line by 
making money from these transactions, and she requested that an 
outside legal team look at what happened, and she requested 
that outside auditors look at what happened, why it was that 
the counsel's office ended up, instead, turning to the same 
legal team whose duty it had been in the first place to prevent 
those transactions from endangering the company, turning to 
them to ask them if it was a good idea to get an outside legal 
team and then receiving a reply, I suppose that you could sort 
of guess would be coming, that, no, everything is okay, we 
don't need a legal team to look over our shoulder and tell us 
we did a good job or a bad job.
    Why, instead, wasn't an outside legal team called in to 
look at whether or not people had adequately protected the 
company? And why it was, at that point, that counsel's office 
said maybe it isn't a good idea to get some outside auditors in 
and check and see whether the auditors hired by the company had 
led us astray.
    Why, instead, the same legal team is called in to give 
advice to the president of the company that, no, you don't need 
anybody else to look at this, everything is okay. It is a 
pretty serious problem.
    Mr. Chairman, I look forward to this hearing and look 
forward to giving these important witnesses a chance to clarify 
these questions and to help us understand these complex 
relationships. I yield back my time.
    [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 let me commend you for doing such 
a thorough job throughout this process. This Subcommittee's task has 
been to investigate the reasons behind this sad tale of Enron's 
collapse, so that the Full Committee can understand what went wrong.
    Only by accurately identifying the basic problems can we accurately 
identify an appropriate remedy. And I believe we've gone a long way 
towards this goal. We have more to learn, but we've been able to begin 
exploring remedies because of the Subcommittee's good and instructive 
work, and I thank you for that.
    This morning we turn to the attorneys--the people whose duty it was 
to protect the interests of Enron and its shareholders. I look forward 
to hearing what they have to say for themselves.
    Last month, when we had Sherron Watkins before us, I pointed to a 
legal doctrine known as the last clear chance; this holds that, 
basically, even if you're totally in the right on the highway, if you 
had that last clear chance to avoid a crash, you could be responsible 
for what happened.
    Sherron Watkins offered Enron's leadership that last clear chance 
to avoid the crash. And what strikes me today about her action as a 
loyal employee was that Sherron Watkins was not an attorney. She did 
the right thing, but she did something that was not in her job 
description, something not directly associated with her function at 
Enron.
    What also strikes me is that some of the people who should have 
shown Enron leadership the proper course--who could have prevented the 
crash--are sitting before us today. They could have acted before 
matters got out of hand. They could have been more skeptical of the 
proposals and promises of the business teams. They could have looked to 
learn what was really happening, and warned Enron leadership about what 
they found. But they didn''t do this. They were not around to provide a 
last clear chance to save the company.
    I think it says something when you have non-attorneys doing what 
attorneys are supposed to be doing. The attorneys are the people others 
rely upon to make sure matters are okay, are legal, are not going to 
put a company at undue risk.
    They're the adult supervision. And it's clear from our 
investigation that others in the company, particularly on the Board of 
Directors, either relied on this supervision, or--as Mr. Skilling seems 
to have done--hid behind it to excuse their actions.
    Now I understand the arrangements of duties and functions among the 
attorneys was complex. Responsibilities were divided. I know that Enron 
was a huge and complicated operation. And so I want to hear their side 
of the story.
    I want to hear from them about the LJM transaction approval 
process, which was meant to prevent the CFO from taking advantage of 
the company and its shareholders. I look forward to learning about the 
attorney reactions to emerging warnings that the process was flawed, 
that questionable negotiations were taking place, that there were 
potentially serious problems to investigate.
    I want to know why outside counsel, with the duty to make sure 
extremely complex transactions would not put Enron at risk, saw fit to 
sign off--providing the legal cover for what would turn out to be very 
destructive transactions indeed.
    We do have a lot to cover this morning, Mr. Chairman. And I too 
would like to thank the witnesses for coming before us this morning. 
They've been responsive to our staff's requests and I thank them for 
their willingness to help us accurately identify the problems here.
    I yield back.

    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes for 3 minutes for an opening statement the 
gentlelady from--I beg your pardon. The Chair recognizes the 
ranking member of the full committee, the gentleman from 
Michigan, Mr. Dingell.
    Mr. Dingell. Mr. Chairman, I thank you for your courtesy. I 
commend you for these hearings and for the inquiry by this 
subcommittee into the matters now under consideration.
    I want to depart from my prepared statement just to commend 
my friend, the Chairman, also of the full committee for the 
courage and the energy which he has brought to the matters 
before us, and to express to him my respect and affection.
    Mr. Chairman, one of the things that struck me as we get 
deeper and deeper into the Enron investigation is the ability 
of almost all of the people involved to disclaim knowledge of, 
or responsibility for, any of the events that caused Enron's 
collapse.
    I remember a case when I was a young lawyer in the Detroit 
River area. Three ships had collided in a fog in the middle of 
the Detroit River, and in the case the judge observed that this 
event could not have occurred because of the testimony of all 
the witnesses indicated that none of the vessels was within 
three-quarters of a mile of the point of impact.
    The most notable of those proclaiming lack of knowledge and 
responsibility are Messrs. Skilling, the former president and 
chief executive officer, and Lay, the chairman of the board. 
Now, although Mr. Skilling is widely understood to have been 
the architect of Enron as an asset-lite energy trading company 
with an increasing off-balance-sheet debt load, he presents 
himself as the unfortunate, unknowing ``victim'' of some as-
yet-undefined forces of the marketplace.
    Mr. Lay, who was CEO during all of Enron's history except 
the last 6 months when Mr. Skilling held the job, claims that 
he knew even less. Yet most of these top officers ran a company 
which numerous former and current employees have described as 
``crooked,'' a ``pyramid scheme,'' the home of ``house of cards 
accounting,'' a place where you ``drank the Kool-aid'' instead 
of questioning what was going on, and fed the earnings 
``monster'' with more and more questionable deals.
    Moreover, the Board of Directors, from one end to the 
other, was asleep. For example, they never even bothered to 
find out how much Andrew Fastow, the company's chief financial 
officer, was making on his side deals with the company. To this 
day, neither the Board nor anyone at the top levels of Enron 
knows exactly how much Mr. Fastow made on those deals. Nor did 
the Board bother to check if the controls it had ordered to 
keep these deals above-board were actually being carried out.
    Today we are going to hear more disclaimers of 
responsibility. Today we are going to hear from lawyers who 
will disclaim with great diligence. Some asked questions, but 
never followed up, and we will hear from other lawyers who knew 
of problems but never asked questions. For example, both the 
in-house and outside lawyers who represented Enron in the 
related-party transactions involving Mr. Fastow and Mr. Michael 
Kopper, who worked with Mr. Fastow, will tell us that.
    It wasn't their responsibility to make sure that Enron or 
its accountants knew about the side guarantee with Barclay's 
Bank that brought down the Jedi-Chewco deal.
    It wasn't their responsibility to make sure that Mr. 
Kopper's interest in Chewco was approved by the Office of the 
Chairman and known by the Board of Directors, even though these 
lawyers knew it was a conflict of interest violation.
    It wasn't their responsibility to make sure the many deals 
made between Mr. Fastow's LJM entities and Enron were actually 
at arm's length and represented a fair deal for Enron in both 
the short and the long term.
    We will hear that most of these lawyers didn't even know 
what controls were required by the Board of Directors to try 
and keep related-party deals above-board. They were told that 
the Board had approved the relationship with Mr. Fastow, and 
that was enough. Sometimes they even relied on Mr. Fastow 
himself as justification.
    We will hear from lawyers who tried to find out how much 
Mr. Fastow made so it could be included in Enron's proxy, but 
when Mr. Fastow refused to tell them, their response was, 
``Next year we will do it.'' We will hear that lawyers were not 
responsible for asking about accounting decisions. We will hear 
from lawyers who ignored, rationalized, or even discounted 
problems brought to the company's attention by Sherron Watkins 
and others.
    Maybe the lawyers involved in the Enron mess were simply 
doing their job. I find this a most troublesome prospect. And I 
would note that it appears that the legal profession may have 
changed in the 50 years since I was sworn in to the bar. At 
that time, we thought that it was the responsibility of the 
lawyer to serve with the highest integrity and responsibility, 
to protect the interests of the clients, and to see to it that 
justice is done.
    Until this fiasco, then, I had always thought of lawyers as 
more than highly paid technicians. In this case, I was 
apparently wrong. It is very sad, Mr. Chairman.
    Thank you.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Thank you, Mr. Chairman. One of the things that has struck me as we 
get deeper and deeper into the Enron investigation is the ability of 
almost all of the people involved to disclaim knowledge of, or 
responsibility for, any of the events that caused Enron's collapse. The 
most notable of these are, of course, Jeffrey Skilling, the former 
president and chief executive officer, and Kenneth Lay, the chairman of 
the board.
    Although Mr. Skilling is widely understood to have been the 
architect of Enron as an asset-light, energy trading company with an 
increasing off-balance-sheet debt load, he presents himself as a 
unknowing ``victim'' of some as-yet-undefined forces of the 
marketplace. Mr. Lay, who was CEO for all of Enron's history except the 
six months when Mr. Skilling held the job, claims to know even less. 
Yet both of these top officers ran a company which numerous former and 
current employees have described as ``crooked,'' a ``pyramid scheme,'' 
the home of ``house of cards accounting,'' a place where you ``drank 
the Kool-aid'' instead of questioning what was going on, and fed the 
earnings ``monster'' with more and more questionable deals. Moreover, 
the Board of Directors was asleep. For example, it never even bothered 
to find out how much Andrew Fastow, the company's chief financial 
officer, was making on his side deals with the company. To this day, 
neither
    the board nor anyone at the top levels of Enron knows exactly how 
much Mr. Fastow made on those deals. Nor did the board bother to check 
if the controls it had ordered to keep these deals above-board were 
actually being carried out.
    Today, we will hear more disclaimers of responsibility. We will 
hear from lawyers who asked questions, but never followed up. And we 
will hear from lawyers who knew of problems, but never asked questions. 
For example, both the in-house and the outside lawyers who represented 
Enron in the related-party transactions involving Mr. Fastow and 
Michael Kopper, who worked for Mr. Fastow, will tell us that:

--It wasn't their responsibility to make sure that Enron or its 
        accountants knew about the side guarantee with Barclay's bank 
        that brought down the JEDI-Chewco deal.
--It wasn't their responsibility to make sure that Mr. Kopper's 
        interest in Chewco was approved by the Office of the Chairman 
        and known by the Board of Directors, even though these lawyers 
        knew it was a conflict of interest violation.
--It wasn't their responsibility to make sure the many deals made 
        between Mr. Fastow's LJM entities and Enron were actually at 
        arm's length and represented a fair deal for Enron in both the 
        short and the long term.
    We will hear that most of these lawyers didn't even know what 
controls were required by the Board of Directors to try to keep the 
related-party deals above-board. They were told that the board had 
approved the relationship with Mr. Fastow, and that was enough. 
Sometimes they relied on Mr. Fastow himself as justification.
    We will hear from lawyers who tried to find out how much Mr. Fastow 
made so it could be included in Enron's proxy, but when Mr. Fastow 
refused to tell them, their response was--``next year we'll do it.'' We 
will hear that lawyers were not responsible for asking about accounting 
decisions. And we will hear from lawyers who ignored, rationalized, or 
discounted problems brought to the company's attention by Sherron 
Watkins and others.
    Maybe all the lawyers involved in the Enron mess were simply doing 
their job--a most troublesome prospect. Until this fiasco, I had always 
thought of lawyers as more than just highly paid technicians. In this 
case, I apparently was wrong.

    Mr. Greenwood. The Chair thanks the gentleman from Michigan 
and recognizes the gentleman from Florida, Mr. Stearns, for 3 
minutes.
    Mr. Stearns. Good morning, and thank you, Mr. Chairman, for 
holding this hearing. And let me again commend the staff for 
the very significant and competent job they are doing in 
preparing us and getting the witnesses here.
    Mr. Chairman, over the course of the hearings we have had 
on this, we have learned of Enron's collapse, that it was 
basically a complete failure and a meltdown of fundamental 
responsibilities and oversight. We have heard from a number of 
Enron and Andersen officials and have developed what we think 
is a very good record of all of these transactions.
    LJM, the Raptor, the Chewco, were developed and managed and 
hidden from scrutiny--this despite the numerous officials 
pleading the Fifth Amendment here in front of our committee in 
response to the subcommittee's questioning. So this hearing is 
very pertinent.
    Mr. Chairman, I went on the internet to look up the 
American Bar Association's website to get and understand its 
model rules for professional conduct. And it is interesting, 
the first rule for lawyers under the rules for professional 
conduct is competence. And, my colleagues, let me just read 
what it says. ``A lawyer shall provide competent representation 
to a client. Competent representation requires the legal 
knowledge, skill, thoroughness, and preparation reasonably 
necessary for preparation.''
    So, Mr. Chairman, let us look at our hearing in 
perspective. In fact, let us get to the nitty-gritty. Our 
witnesses before us today are all attorneys. Their job was to 
be the legal watchdog for Enron's transaction. From the 
information we have discovered we are faced with this question: 
was the failure of oversight and responsibility due to a lack 
of competence or to a measure of culpability?
    Mr. Chairman, Jan Avery was a woman who was an accountant 
at Enron in 1993. She put herself through college going at 
night. She didn't have polo shirts on and khakis when she came 
to work. She came in a suit. In 1993, she was given a thin 
manilla folder containing three sheets of paper. On one there 
was a number, $142 million.
    This was the routine loss. It was a staggering amount for 
this company and for this young accountant to understand. So 
she said, ``Where are the books for Enron Oil? How am I 
supposed to justify $142 million loss for State tax purposes?''
    Mr. Chairman, no one could answer her in Enron Company. So 
I go back. We have lawyers here whose responsibility was to be 
the watchdog and protect Enron. If this woman accountant at 
Enron knew in 1993 that there was a problem, surely the people 
at this front desk should have provided advice that was more 
competent than this young woman who put herself through night 
school as an accountant.
    So we are here today to find out what happened. And so, Mr. 
Chairman, I commend you and your staff.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes for 3 minutes for the purpose of an opening 
statement the gentlelady from Colorado, Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. Mr. Chairman, this 
investigation has really seemed to me like piecing together a 
big jigsaw puzzle. And we have looked at a number of the pieces 
of the puzzle so far. We have heard from senior management from 
Enron of all different flavors. We have heard from the Board of 
Directors. We have heard from the auditors. We have heard from 
outside experts. And until today there has been a big piece of 
that puzzle right in the middle missing, and that is the 
attorneys who were advising Enron throughout the events that we 
all know so well at this point.
    I am looking forward to hearing what the attorneys have to 
say today. And, in particular, I am interested in Vinson & 
Elkins' representation of their client, and, in particular 
there, I am interested in this preliminary investigation of 
allegations that Vinson & Elkins did from Sherron Watkins' 
memo. The reason I am interested in this is I think it is 
almost a parable for what happened throughout Enron and for 
what happened from all of the experts that were advising Enron, 
because Ms. Watkins said in her memo to Mr. Lay, ``I am 
incredibly nervous that we will implode in a wave of accounting 
scandals. My 8 years of Enron work history will be worth 
nothing on my resume. The business world will consider the past 
successes as nothing but an elaborate accounting hoax.''
    So what does Vinson & Elkins do when Enron asked them to do 
a so-called independent investigation of these allegations? 
Vinson & Elkins says, ``It was decided that our initial 
approach would not involve the second-guessing of the 
accounting advice and treatment provided by Arthur Andersen. 
There would be no detailed analysis of each and every 
transaction, and there would be no full-scale discovery-style 
inquiry.''
    If the allegation is that there are accounting problems, 
how on earth can you have any kind of analysis when you don't 
look at the accounting in coming up with your assessment?
    These and many other questions I am sure will be made clear 
today, Mr. Chairman, and I am looking forward to hearing the 
testimony.
    Thank you, and I yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentlelady and 
recognizes the gentleman from North Carolina, Mr. Burr, for 3 
minutes for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman. Let me take this 
opportunity to thank our witnesses today for their willingness 
to come in as we continue to peel the layers of the onion back 
and try to figure out exactly what happened.
    Mr. Chairman, let me commend you. The way that you have 
structured these hearings, the patience that you have shown, 
rather than to run out and grab headlines, we have tried to put 
people together that could provide facts. And I want to just 
turn to some testimony that we are going to hear today from one 
of the partners at Vinson & Elkins.
    And that testimony says the Enron bankruptcy filings--Enron 
listed more than 400 law firms as having represented them. 
Clearly, this was not a situation where Enron fell in trouble 
because they didn't seek or have provided for them enough legal 
help. Enron's legal affairs were directed by a highly 
sophisticated in-house legal department consisting of 
approximately 250 in-house lawyers. Clearly, they had at their 
fingertips expertise that most companies don't have.
    Enron recruited and employed experienced, highly capable 
and well qualified attorneys, many of whom had previously 
practiced in large law firms. There is experience within this 
company that certainly dispels any belief that maybe they were 
ill advised.
    And it goes on in the testimony to say about the report, 
specifically, the report that Vinson & Elkins was asked to 
prepare and to hand over to the company, it says, ``The report 
did conclude that no further investigation was necessary 
because the appropriate senior-level officers of Enron were 
fully aware of the primary concerns of Ms. Watkins, that Ms. 
Watkins wanted Mr. Lay to address, and had, in fact, already 
addressed them.''
    Ladies and gentlemen that are here today, let me assure you 
that we have had some Enron officials who have sat before us 
and said they didn't know, they can't remember. Today I hope 
you will help us fill in those blanks of who knew, who should 
remember, and who was told.
    I thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman, Mr. Stupak, for 3 minutes for an 
opening statement.
    Mr. Stupak. Thank you, Mr. Chairman. Over the brief 
President's Day district work period, I held three town hall 
meetings in my northern Michigan district, just as I am sure 
many of my colleagues did. The No. 1 issue I heard about from 
my constituents was not the current budget proposals, not a 
desire for tax cuts, not even the war against terrorism, 
although they are very concerned about it.
    The No. 1 issue raised by people in my town hall meetings 
was the Enron collapse and their passionate desire to see that 
justice is served.
    My district is about as far away as you can get from 
Houston, Texas, without leaving the continental United States. 
But constituents seem to feel a bond with the Enron employees 
and their shareholders.
    Mr. Chairman, my constituents, like many of us, are 
saddened. They are angry, and they are frustrated. They are 
saddened to see the lives of so many Enron employees shattered. 
They are angry about the shredding of public trust by all the 
parties involved in the Enron debacle, and they are frustrated 
with the fact that many of those who have come before our 
committee, with maybe the exception of Ms. Watkins, have played 
dumb and had a memory that has faded away faster than Enron 
stock has dropped.
    Now, I hope that today's panelists will be different. I 
hope they will answer our questions completely and honestly. I 
hope they will not have selective memory, and I hope they will 
provide us with answers.
    Mr. Chairman, I yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from New Hampshire, Mr. Bass, for 3 
minutes for his opening statement.
    Mr. Bass. Thank you, Mr. Chairman. I really do appreciate 
your holding this hearing. I believe this is either the fourth 
or fifth hearing we have had on this. My friend from North 
Carolina said, ``I believe it has been thoughtful and pragmatic 
and informational, helpful for us in understanding what is 
clearly one of the most complex financial catastrophes in 
recent U.S. history.''
    And I also appreciate the opportunity to hear from counsel 
of various capacities willingly, which is somewhat of a change, 
and I look forward to your testimony. And of particular 
interest to me, quite obviously, to other members of the 
subcommittee, as you have heard, are the views on the 
expectations of how you define fiduciary duty and conflict of 
interest.
    And I am certain at the end of the day we will have a 
greater understanding of Enron's related party transactions and 
other agreements with those who were supposed to be protecting 
the company's shareholders' interests. But I hope we also have 
some sense of what these various counselors had in mind when 
they made decisions to engage in certain behavior and otherwise 
ignore what may appear to be rather clear rules of ethics and 
accepted behavior.
    Mr. Chairman, I yield back my time, so that we may proceed 
with the testimony and inquiry.
    [Additional statement submitted for the record follows:]
    Prepared Statement of Hon. Paul E. Gillmor, a Representative in 
                    Congress from the State of Ohio
    Thank you Mr. Chairman for your continued efforts in sorting 
outEnron's financial breakdown. In particular, I welcome this 
opportunity to seek the viewpoints of the company's in-house and 
outside counsel. I am hopeful the witnesses today will shed even more 
light on how an irresponsible corporation misrepresented its financial 
condition and manipulated all who had an interest in them.
    I should also point out that in an effort to further increase 
corporate accountability and protect shareholders' rights, I recently 
introduced H.R. 3745, the Corporate Charitable Disclosure Act of 2002. 
This legislation would require companies to make publicly available 
each year the total value of contributions made to non-profit 
organizations during the previous fiscal year.
    Once again I thank the Chairman for my time and look forward to the 
witnesses' testimony.

    Mr. Greenwood. The Chair thanks the gentleman for that, and 
welcomes our witnesses today.
    Let me introduce them. They are Scott M. Sefton, Esquire, 
former General Counsel with Enron Global Finance. Good morning, 
sir.
    Rex Rogers, Esquire, Vice President and Associate General 
Counsel from Enron Corporation. Good morning, Mr. Rogers.
    James V. Derrick, Jr., Esquire, former General Counsel, 
Enron Corporation. Good morning, Mr. Derrick.
    Joseph C. Dilg, Esquire, Managing Partner, Vinson & Elkins. 
Good morning, sir.
    Ronald T. Astin, Esquire, Partner of Vinson & Elkins. Good 
morning to you.
    And Carol L. St. Clair, Esquire, former Assistant General 
Counsel, ECT Resources Group of Enron Corporation. Good 
morning, Ms. St. Clair.
    You are aware, all of you, that the committee is holding an 
investigative hearing. And in doing so, we have the practice of 
taking testimony under oath. Do any of you have objections to 
giving your testimony under oath? Seeing no such objection, I 
would also advise you that under the rules of the House and the 
rules of this committee, you are entitled to be advised by 
counsel.
    Do any of you--during your testimony, do any of you seek to 
be advised by counsel during your testimony? Seeing that none 
of you do, in that case, if you would please rise and raise 
your right hands, I will swear you in.
    [Witnesses sworn.]
    Mr. Greenwood. Okay. You may please be seated. You are now 
under oath.
    And let me begin with Mr. Sefton, and ask you, sir, do you 
have an opening statement?

  TESTIMONY OF SCOTT M. SEFTON, FORMER GENERAL COUNSEL, ENRON 
    GLOBAL FINANCE, ENRON CORPORATION; REX R. ROGERS, VICE 
  PRESIDENT AND ASSOCIATE GENERAL COUNSEL, ENRON CORPORATION; 
     JAMES V. DERRICK, JR., FORMER GENERAL COUNSEL, ENRON 
CORPORATION; JOSEPH C. DILG, MANAGING PARTNER, VINSON & ELKINS, 
L.L.P.; RONALD T. ASTIN, PARTNER, VINSON & ELKINS, L.L.P.; AND 
   CAROL L. ST. CLAIR, FORMER ASSISTANT GENERAL COUNSEL, ECT 
               RESOURCES GROUP, ENRON CORPORATION

    Mr. Sefton. Yes, I do. Chairman Greenwood----
    Mr. Greenwood. Would you pull the microphone over to you? 
It is rather directional. It is the silver one that amplifies 
your voice, and the closer the better.
    Mr. Sefton. Chairman Greenwood----
    Mr. Greenwood. You have 5 minutes to give your opening 
statement.
    Mr. Sefton. [continuing] and members of the subcommittee, 
good morning. I joined Enron Global Finance in the fall of 
1999. I left Enron Global Finance about a year later in early 
October 2000.
    I understand that this subcommittee----
    Mr. Greenwood. I am sorry to interrupt you, Mr. Sefton. You 
probably want to pull that microphone--raise it up a little 
bit. There you go. And get that as close to you as possible. 
Thank you, sir.
    Mr. Sefton. I understand that this subcommittee would like 
to discuss with me today certain matters relating to my time in 
Enron Global Finance. Please note that it has been over a year 
since I worked at Enron. That as a former employee I do not 
have access to my own Enron documents, and have not had access 
since I left the company, and that I have had a limited amount 
of time to prepare for this hearing.
    That said, I look forward to answering your questions today 
to the best of my ability.
    Mr. Greenwood. Thank you, Mr. Sefton. We will be mindful of 
those concerns.
    Mr. Rogers, do you have an opening statement, sir?

                   TESTIMONY OF REX R. ROGERS

    Mr. Rogers. I just have a short comment. Good morning, Mr. 
Chairman.
    Mr. Greenwood. Good morning, sir.
    Mr. Rogers. I do not have a long prepared statement but 
want to thank the committee for inviting me here today. For the 
past 16\1/2\ years, I have been employed as an attorney for 
Enron Corp, currently managing several corporate attorneys in 
the fields of employment law, environmental law, information 
and technology, intellectual property, securities, mergers and 
acquisitions, and general corporate matters. I have neither a 
background nor expertise in accounting matters.
    Over the past several months I have cooperated fully with 
the Wilmer, Cutler & Pickering attorneys in preparation of the 
Powers Report, with the FBI who interviewed me on several 
issues, and with your staff members only a week ago. Now I hope 
to be able to assist the members in your inquiry of Enron Corp 
and am prepared to answer any and all of your questions.
    Thank you.
    [The prepared statement of Rex R. Rogers follows:]
   Prepared Statement of Rex R. Rogers, Vice President and Associate 
                   General Counsel, Enron Corporation
    Mr. Chairman: I do not have a prepared statement, but want to thank 
the Committee for inviting me here today.
    For the past sixteen and one-half years I have been employed as an 
attorney for Enron, now managing several corporate attorneys in the 
fields of employment law, environmental law, information and 
technology, intellectual property, securities, mergers and 
acquisitions, and general corporate matters. I neither have a 
background nor expertise in accounting matters.
    Over the past several months I have cooperated fully with the 
Wilmer, Cutler & Pickering attorneys in preparation of the Powers 
Report; with the FBI who interviewed me on several issues; and with 
your staff members only a week ago. Now I hope to be able to assist the 
Members in your inquiry of Enron Corp. and am prepared to respond to 
any questions.
    Thank you.

    Mr. Greenwood. Thank you, Mr. Rogers. We do appreciate your 
cooperation.
    Mr. Derrick, do you have an opening statement, sir?

               TESTIMONY OF JAMES V. DERRICK, JR.

    Mr. Derrick. Yes, I do, Mr. Chairman.
    Mr. Greenwood. We can hear you, and, please, you have 5 
minutes to make your opening statement, if you choose to.
    Mr. Derrick. Good morning to each of you. I am Jim Derrick, 
and I, too, am pleased to be here with you today to answer any 
questions you may have for me.
    From the summer of 1991 until March 1 of this year, I had 
the great privilege of serving as the General Counsel for Enron 
Corp, and as a member of a legal team of more than 200 women 
and men for whom I had, and still have, the utmost respect and 
admiration. I graduated from the University of Texas School of 
Law in 1970, had the honor of serving as judicial clerk to the 
Honorable Homer Thornberry of the United States Court of 
Appeals for the Fifth Judicial Circuit, and then I practiced 
law at Vinson & Elkins for 20 years until I was requested by 
Enron Corp, more than a decade ago, to become its General 
Counsel.
    First, I commend you in your efforts to examine the tragedy 
that has befallen Enron, so that the lessons learned here may 
help others avoid similar misfortune.
    Second, I wish to express my sincerest heartfelt sympathy 
to those members of the Enron family who have lost their jobs 
and suffered financially and otherwise, and to their loved ones 
who have also been affected. I also want to acknowledge with 
great gratitude the ongoing efforts of the more than 20,000 
women and men who are still working at Enron and its affiliated 
companies.
    Finally, while, of course, I can't anticipate all of the 
questions that you will want to ask me today, I do want to 
address very briefly the question that some of you have alluded 
to in previous hearings as to why we did not immediately 
institute a complete forensic investigation, as contrasted with 
a preliminary investigation, into the concerns expressed in the 
letter received by Mr. Kenneth L. Lay last August, utilizing 
firms that had no involvement in the transactions in question.
    When Mr. Lay received the August letter, we took the 
concerns expressed in it very seriously. We wanted to 
ascertain, as promptly as practical, whether the facts 
contained in the letter warranted a full-scale, forensic-type 
investigation. Because of the seriousness of the allegations, 
we believed it best to engage an outside firm to make this 
determination, rather than to rely on an internal inquiry.
    To have turned to firms with no knowledge of these complex 
transactions would necessarily have required them, we believed, 
to expend a very significant amount of time getting up to speed 
before they could provide us with recommendations. We turned, 
therefore, to Vinson & Elkins, a firm that possessed the 
institutional knowledge to commence the preliminary 
investigation quickly, and a firm that is widely regarded as 
one of the world's very best legal institutions.
    Andersen, Enron's independent accounting firm at that time, 
was widely regarded as one of the world's foremost accounting 
institutions. That firm, we believed, had knowledge of the 
transactions and of the company, had repeatedly certified 
Enron's financial statements, and had represented to the 
company's Audit and Compliance Committee that it was 
comfortable with, and had signed off on, the company's 
financial disclosures.
    To have immediately engaged another accounting firm to 
examine the allegations contained in the August letter, without 
first doing a preliminary investigation of the substance of the 
allegations, including Andersen's position on them, would have 
been seen, we believed, in the context of the matters as they 
existed back in August, as an extraordinary act.
    As we have seen from our experience, when we did turn in 
October to an accounting firm and a law firm that had had no 
involvement in the transactions, it required them, despite 
their good faith Herculean efforts, several months to produce a 
report, and even now there seem to be a number of issues in 
respect of which the correct accounting and legal answers to 
these extraordinarily complex issues remain a matter of 
judgment.
    Of course, had I been blessed with the gift of 
clairvoyance, had I been permitted to gaze into the future and 
foresee the events that would unfold in respect of Andersen, I 
would have advocated the choosing of another path back in 
August. But that was a gift that I was not given.
    The decisions in which I participated had to be, and were, 
made in the context of the matters as they then existed. They 
were made in absolute good faith, with the sincere intent of 
ascertaining by means of a prompt preliminary investigation 
conducted by a truly world-class law firm, whether a broader 
investigation, including the engagement of another accounting 
firm, was warranted.
    Members of the committee, I very much appreciate your 
according me the time to make these remarks, and I look forward 
to answering the questions you have for me today to the best of 
my ability and recollection.
    Thank you very much.
    [The prepared statement of James V. Derrick, Jr. follows:]
 Prepared Statement of James V. Derrick, Jr., Former General Counsel, 
                           Enron Corporation
    Good morning, Congressmen. I'm Jim Derrick, and I'm pleased to be 
here to answer the questions you may have for me.
    From the summer of 1991 until March 1 of this year, I had the great 
privilege of serving as the General Counsel of Enron Corp. and as a 
member of a legal team of more than 200 women and men for whom I had, 
and still have, the utmost respect and admiration. I graduated from the 
University of Texas School of Law in 1970, served as judicial clerk to 
the Honorable Homer Thornberry of the United States Court of Appeals 
for the Fifth Judicial Circuit, and then practiced law at Vinson & 
Elkins for 20 years until I was asked by Enron Corp., more than a 
decade ago, to become its General Counsel.
    First, I commend you in your efforts to examine the tragedy that 
has befallen Enron so that the lessons learned here may help others 
avoid similar misfortune.
    Second, I wish to express my sincerest heartfelt sympathy to those 
members of the Enron family who have lost their jobs and suffered 
financially and otherwise, and to their loved ones who have also been 
affected. I also want to acknowledge with gratitude the ongoing efforts 
of the more than 20,000 women and men who are still working at Enron 
and its affiliated companies.
    Finally, while I can't anticipate all the questions you will ask 
today, I do want to address briefly the question that some of you have 
alluded to in previous hearings as to why we did not immediately 
institute a complete forensic investigation--as contrasted with a 
preliminary investigation--into the concerns expressed in the letter 
received by Mr. Kenneth L. Lay last August, utilizing firms that had no 
involvement in the transactions in question.
    When Mr. Lay received the August letter, we took the concerns 
expressed in it very seriously. We wanted to ascertain, as promptly as 
practical, whether the facts contained in the letter warranted a full-
scale, forensic-type investigation. Because of the seriousness of the 
allegations, we believed it best to engage an outside firm to make this 
determination, rather than to rely on an internal inquiry. To have 
turned to outside firms with no knowledge of these complex transactions 
would necessarily have required them, we believed, to expend a very 
significant amount of time getting up to speed before they could 
provide us with recommendations. Therefore, we turned to Vinson & 
Elkins, a firm that possessed the institutional knowledge to commence 
the preliminary investigation quickly and that is widely regarded as 
one of the world's very best legal institutions.
    Andersen, Enron's independent accounting firm at the time, was 
widely regarded as one of the world's foremost accounting institutions. 
The firm, we believed, had knowledge of the transactions and of the 
company, had repeatedly certified Enron's financial statements, and had 
represented to the Company's Audit and Compliance Committee that it was 
comfortable with the Company's financial disclosures. To have 
immediately engaged another accounting firm to examine the allegations 
contained in the August letter without first doing a preliminary 
investigation of the substance of the allegations, including 
ascertaining Andersen's position on them, I believe would have been 
seen, in the context of matters as they existed back in August, as an 
extraordinary act.
    As we have seen from our experience, when we did turn in October to 
an accounting firm and a law firm that had had no involvement in the 
transactions in question, it required them, despite their good faith 
Herculean efforts, several months to produce a report, and even now 
there seem to be a number of issues in respect of which the correct 
accounting and legal answers to these extraordinarily complex issues 
remain a matter of judgment.
    Of course, had I been blessed with the gift of clairvoyance, had I 
been permitted to gaze into the future and foresee the events that 
would unfold in respect of Andersen, I would have advocated the 
choosing of another path last August. But that was a gift I was not 
given. The decisions in which I participated had to be, and were, made 
in the context as matters then existed. They were made in absolute good 
faith, with the sincere intent of ascertaining by means of a prompt 
preliminary investigation conducted by a world class law firm whether a 
broader investigation, including the engagement of another accounting 
firm, was warranted.
    I very much appreciate your according me the time to make these 
remarks, Congressmen. I am ready to answer your questions to the best 
of my ability and recollection. Thank you.

    Mr. Greenwood. Thank you.
    Mr. Dilg, do you have an opening statement?

                   TESTIMONY OF JOSEPH C. DILG

    Mr. Dilg. Yes, sir.
    Mr. Greenwood. You are recognized for 5 minutes.
    Mr. Dilg. Good morning, Mr. Chairman, and members of the 
committee. My name is Joe Dilg. I am the Managing Partner of 
Vinson & Elkins. My partner, Ron Astin, is here to assist me--
to assist the committee in responding to its questions. We 
decided, to economize on time, that I would give the opening 
statement on behalf of both of us.
    Vinson & Elkins, which was founded in 1917, is now an 
international law firm. We have offices worldwide with 
approximately 850 attorneys. Although Mr. Astin and I have each 
personally worked on many Enron matters, we were directly 
involved in only part of the firm's work for Enron. We are 
testifying today only to our own personal knowledge.
    Since Enron's bankruptcy, there have been reports and 
statements that have inaccurately described the role Vinson & 
Elkins played in the advice we gave to Enron. We look forward 
to responding to your questions, because we are confident a 
full exploration of the facts will show that our firm has met 
all of its professional responsibilities.
    First, let me say that the lawyers of Vinson & Elkins are 
greatly saddened by the financial collapse of Enron. Many 
outstanding and decent people who worked at Enron and their 
families have been greatly harmed. Likewise, many Enron 
investors have unfortunately lost a great deal of money. Many 
cities like Houston will be harmed by the loss of the very 
significant business and civic achievements of Enron.
    Our work for Enron consisted of a large number of specific 
projects for which we were selected by the Enron legal 
department. Enron listed in its bankruptcy filing hundreds of 
law firms as having represented Enron. Enron was a significant 
client for many major law firms.
    Enron's legal affairs were directed by a highly 
sophisticated in-house legal department of approximately 250 
lawyers. Enron recruited and employed experienced, highly 
capable, well qualified attorneys, many of whom had previously 
practiced in large law firms. Pursuant to Enron corporate 
policy, Vinson & Elkins, as well as all other outside counsel 
employed by Enron, were employed by and directed to interface 
with Enron's legal department, not Enron's executives.
    Despite our sadness over the collapse of Enron, we remain 
proud to have served as Enron's counsel in many matters. Our 
representation of Enron provided interesting and challenging 
legal work on highly visible transactions and other matters. It 
is a pleasure to work with their highly qualified in-house 
counsel.
    In representing Enron, our lawyers worked closely with the 
world's leading investment banking firms, commercial banks, and 
other major law firms. We provided Enron with quality legal 
services, and we did so professionally and ethically.
    Much of the committee's attention and the media's coverage 
of the relationship between Enron and Vinson & Elkins has 
focused on the preliminary review conducted by Vinson & Elkins 
into allegations made by an Enron Vice President, Ms. Sherron 
Watkins. We are pleased to have the opportunity to discuss that 
matter.
    Ms. Watkins indeed raised serious issues. Contrary to some 
public reports and the implication of previous statements made 
in hearings conducted by this committee, Vinson & Elkins did 
not advise Enron that there were no problems. Our written and 
oral reports pointed out significant issues, including the 
credit problem in the Raptor vehicles, the aggressiveness of 
the accounting, conflicts of interest, litigation risks, and 
the risk of credibility-harming media attention.
    The report did conclude that no further investigation was 
necessary because the appropriate senior-level officers of 
Enron were, at that time, fully aware of the primary concerns 
expressed by Ms. Watkins, and, in fact, were taking actions to 
address them.
    Mr. Fastow had already resigned from his position with the 
LJM partnerships, eliminating the conflict of interest issues 
raised by Ms. Watkins in her letter, and earlier by Mr. McMahon 
to Mr. Skilling. Prior to the delivery of our final written 
report, the company had terminated the Raptor entities, which 
were the primary focus of Ms. Watkins' concerns. The company 
reported in its earnings release for the third quarter of 2001 
a loss of more than $500 million associated with such 
termination.
    The bankruptcy of Enron in December of 2001, approximately 
6 weeks after we delivered our written report, appears to have 
been due to the convergence in the fall of 2001 of a number of 
factors, many of which related to investment decisions made 
years before in current events outside of Enron's control.
    No one can deny that the adverse publicity associated with 
the related party transactions and the accounting errors 
related to the November restatement announcements contributed 
to the loss of confidence Enron experienced in the energy 
trading and financial markets. This confidence was critical to 
the continued success of Enron's trading operations which 
accounted for a significant portion of their business.
    With regard to the related party transactions, it is 
important to consider the role of legal counsel. If a 
transaction is not illegal and has been approved by the 
appropriate levels of corporation's management, lawyers, 
whether inside corporate counsel or with an outside firm, may 
appropriately provide the requisite legal advice and opinions 
about legal issues relating to the transactions.
    In doing so, the lawyers are not approving of the business 
decisions that were made by their clients. Likewise, lawyers 
are not passing on the accounting treatment of the 
transactions.
    In conclusion, I want to make it very clear that we are 
confident that Vinson & Elkins fully met its ethical and 
professional responsibilities in connection with our 
representation of Enron. We are pleased to assist in the 
committee's deliberations and are happy to answer your 
questions within the constraints of our professional 
responsibility to our clients.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Joseph C. Dilg follows:]
Prepared Statement of Joseph C. Dilg, Managing Partner, Vinson & Elkins
    Good morning Mr. Chairman and members of the Committee. My name is 
Joe Dilg. I am the Managing Partner of Vinson & Elkins L.L.P. Vinson & 
Elkins, founded in 1917, is now an international law firm of 
approximately 850 lawyers. My partner Ron Astin is with me to assist in 
answering the Committee's questions.
    From 1991 until December 2001, I served as the Vinson & Elkins 
partner primarily responsible for coordinating the firm's relationship 
with Enron. In this role, I coordinated much of the legal work 
performed by Vinson & Elkins for Enron through all of our offices. 
Although Mr. Astin and I each personally worked on many Enron matters, 
we were directly involved in only part of Vinson & Elkins' work for 
Enron.
    This statement, as well as the testimony that Mr. Astin and I will 
provide, is based solely upon our individual personal knowledge and 
best recollection of the events. We cannot purport to know and thus be 
able to speak to all of the knowledge and information possessed by all 
lawyers at our firm.
    Since Enron's bankruptcy, there have been reports and statements 
that inaccurately describe the role Vinson & Elkins played and the 
advice we gave. We look forward to responding to questions as fully as 
possible because we are confident a full exploration of the facts will 
show that our firm fully met its professional obligations.
    First, let me say that the lawyers of Vinson & Elkins are greatly 
saddened by the financial collapse of Enron. Many outstanding and 
decent people who worked at Enron and their families have been greatly 
harmed. Likewise, many Enron investors have unfortunately lost a great 
deal of money. Many cities like Houston will be harmed by the loss of 
the very significant business and civic contributions of Enron and its 
employees.
    Our work for Enron consisted of a large number of specific projects 
for which we were selected by Enron's legal department. In the Enron 
bankruptcy filings, Enron listed more than 400 law firms as having 
represented Enron. Enron was a significant client for a number of major 
law firms.
    Enron's legal affairs were directed by a highly sophisticated in-
house legal department consisting of approximately 250 attorneys. Enron 
recruited and employed experienced, highly capable, and well qualified 
attorneys, many of whom had previously practiced in large law firms.
    Pursuant to Enron corporate policy, Vinson & Elkins and other 
outside attorneys were employed by and directed to interface with 
Enron's legal department, not Enron's executives.
    Despite our sadness over the collapse of Enron, we remain proud to 
have served as Enron's counsel in many matters. Our representation of 
Enron provided interesting and challenging legal work on highly visible 
matters, and it was a pleasure to work with their very able in-house 
counsel. In representing Enron, our lawyers worked closely with many of 
the world's leading investment banking firms, commercial banks, and law 
firms. We provided Enron with quality legal services, and we fully met 
our professional and ethical obligations in rendering those services.
    Much of the Committee's attention and the media's coverage of the 
relationship between Enron and Vinson & Elkins has focused on a 
preliminary review conducted by Vinson & Elkins into allegations made 
by an Enron Vice President, Ms. Sherron Watkins, in a letter and 
supplemental materials delivered to Mr. Kenneth Lay in August of 2001. 
We are pleased to have an opportunity to discuss that matter.
    Ms. Watkins raised serious issues. Contrary to some public reports 
and the implication of some previous statements made in hearings 
conducted by this Committee, Vinson & Elkins did not advise Enron that 
there were no problems. Our written report pointed out significant 
issues, including the credit problem in the Raptor vehicles, the 
aggressiveness of the accounting, conflicts of interest, litigation 
risks, and the risk of credibility-harming media attention.
    The report did conclude that no further investigation was necessary 
because the appropriate senior level officers of Enron were fully aware 
of the primary concerns Ms. Watkins wanted Mr. Lay to address--and had 
in fact already addressed them. Mr. Fastow had resigned from his 
position with the LJM partnerships, eliminating the conflict of 
interest problems raised by Ms. Watkins and earlier by Mr. McMahon. 
Prior to the delivery of our final written report, the Company 
terminated the Raptor entities which were the primary focus of Ms. 
Watkins' concerns. The Company reported in its earnings release for the 
third quarter of 2001 a loss of more than $500 million attributable to 
the termination.
    The bankruptcy of Enron in December of 2001, approximately six 
weeks after we delivered our written report, has been the subject of 
numerous published analyses which have made clear that Enron faced very 
significant business challenges. Enron had made major and highly 
publicized investments in the broadband, water, international 
infrastructure, and retail electric businesses, all of which had 
resulted in significant illiquid capital investments and large losses 
for the company. The price of Enron's common stock had already declined 
approximately 60 percent from August 2000 to August 2001, when Mr. 
Skilling's resignation created even more uncertainty about the company. 
At the same time, Enron's online trading through Enron Online and the 
related dependency on trade credit from its counter-parties was 
experiencing explosive growth.
    In hindsight, there appears to be a consensus that these events, 
coupled with impending maturities of a significant amount of debt and 
the turmoil in the financial markets created by the tragic events of 
September 11, 2001, placed Enron in an extremely vulnerable position in 
the fall of 2001. No one can deny, however, that the adverse publicity 
associated with the related party transactions and the accounting 
errors related to the November restatement announcements contributed to 
the loss of confidence Enron experienced in energy trading and 
financial markets. This confidence was critical to the continued 
success of Enron's trading operations, which accounted for a 
significant portion of Enron's business.
    With regard to the related party transactions, it is important to 
consider the role of legal counsel. If a transaction is not illegal and 
it has been approved by the appropriate levels of a corporation's 
management, lawyers, whether corporate counsel or with an outside firm, 
may appropriately provide the requisite legal advice and opinions about 
legal issues relevant to the transactions. In doing so, lawyers are not 
approving the business judgment of their clients. Likewise, lawyers are 
not responsible for the accounting treatment of the transactions.
    In conclusion, I want to make it very clear that we are confident 
that Vinson & Elkins fully met its professional responsibilities in 
connection with our representation of Enron. We are pleased to assist 
in the Committee's deliberations and are happy to answer your 
questions, within the constraints of our professional responsibilities 
to our clients.

    Mr. Greenwood. Thank you, Mr. Dilg.
    Mr. Astin, I understand that Mr. Dilg's opening statement 
spoke for you as well?
    Mr. Astin. That is correct, Chairman.
    Mr. Greenwood. Very well.
    Ms. St. Clair, do you have an opening statement?

                 TESTIMONY OF CAROL L. ST. CLAIR

    Ms. St. Clair. Yes, I do.
    Mr. Greenwood. Okay. You are recognized for 5 minutes.
    Ms. St. Clair. Good morning. Mr. Chairman, and members of 
the subcommittee, my name is Carol St. Clair. I start----
    Mr. Greenwood. I am going to ask you to move that white 
notebook and then pull the microphone front and center there 
and get it nice and close. Thanks.
    Ms. St. Clair. I started at Enron in 1994 working for the 
Liquids Group in the Legal Department of Enron North America 
Corporation. In 1995, after the Liquids Group was sold, I 
transferred to Enron North America's Finance Group. I worked in 
Enron North America's Finance Group until March 1999, when I 
transferred to the Financial Trading Group of Enron North 
America, where I remained until June of 2000.
    In January 2001, after a 6-month maternity leave, I joined 
Enron North America's Power Trading Group, which along with the 
Gas Trading Group was sold in February in Enron's bankruptcy 
proceeding.
    As you know, Mr. Chairman, I am appearing this morning 
voluntarily. To date, I have fully and freely cooperated with 
the subcommittee's investigation, and intend to continue to do 
so. Mr. Chairman, I will, to the best of my ability, be glad to 
answer questions you or any of the members of the subcommittee 
may have this morning. Thank you.
    [The prepared statement of Carol St. Clair follows:]
    Prepared Statement of Carol St. Clair, Former Assistant General 
            Counsel, ETC Resources Group, Enron Corporation
    Good morning. Mr. Chairman and Members of the subcommittee, my name 
is Carol St. Clair. Last month, I accepted a new position as a trading 
attorney in the Legal Department of UBS Warburg Energy, LLC after 
working at Enron Corporation for more than seven years. I started at 
Enron in 1994, working for the Liquids Group in the legal department of 
Enron North America Corporation. In 1995, after the Liquids Group was 
sold, I transferred to Enron North America's Finance Group. I worked in 
the Finance Group until March 1999 when I transferred to Enron North 
America's Financial Trading Group where I served until June 2000. In 
January 2001, after a six month maternity leave, I joined Enron North 
America's Power Trading Group.
    As you know, Mr. Chairman, I am appearing this morning voluntarily. 
To date, I have fully and freely cooperated with the subcommittee's 
investigation and intend to continue to do so. Mr. Chairman, I will, to 
the best of my ability, be glad to answer questions you or any other 
members of the subcommittee may have.
    Thank you.

    Mr. Greenwood. We thank you, Ms. St. Clair, and appreciate 
your cooperation.
    The Chair recognizes himself for 10 minutes for purposes of 
inquiry. And let me address my first question to Mr. Dilg. Mr. 
Dilg, you are the Vinson & Elkins engagement partner for the 
Enron account, and you have worked on the account since 1990, 
when Jim Derrick handed over the account to you when he left 
V&E to become Enron's General Counsel.
    Reportedly, Enron is V&E's single largest client. V&E 
billed Enron over $36 million in 2001 and over $150 million 
during the past 5 years. By comparison, Arthur Andersen billed 
$54 million to Enron in 2001. V&E's partners earned a reported 
average annual income of $655,000. Your first year associates, 
straight out of law school, salary starts at $122,000 per year.
    In August of 2001, Jim Derrick called and asked you to look 
into allegations regarding accounting improprieties and 
conflicts of interest at Enron. Sherron Watkins asked that 
Enron investigate her concerns and specifically recommended 
that V&E not be used, because V&E had done much of the legal 
work on the problematic transactions.
    Nevertheless, you and Mr. Derrick concluded that V&E could 
conduct a review of Ms. Watkins' allegations. In brief, V&E 
took on the task of investigating its own work. The question 
is: was there not an inherent and obvious conflict of interest 
for V&E in taking on the investigation?
    Mr. Dilg. No, sir, there was not a conflict of interest in 
Vinson & Elkins undertaking the investigation. Ms. Watkins 
raised a number of issues in her letter. Her primary concern 
was Mr. Lay being aware of the business issue that faced Enron 
that there were large losses in the Raptor partnerships that 
are large obligations under the derivatives written with the 
Raptor partnerships that would be backed up by Enron stock, and 
the issue of how to deal with that with the Enron shareholders 
going forward as far as the dilution that would occur.
    She raised issues of the conflict of interest created by 
Mr. Fastow's participation in LJM and a number of other issues. 
She mentioned in her letter that Vinson & Elkins had written 
true sale opinions on some of the transactions, and, therefore, 
would have a conflict, but her allegations did not address the 
legal work provided by Vinson & Elkins. We were not being asked 
to review our own work.
    Mr. Derrick was aware that we had previously represented 
Enron on some of the transactions that she was talking about, 
but the appropriate standard, I believe, is whether or not our 
own interest would materially interfere with our work. We did 
not feel that we had a conflict of interest based on what we 
were being asked to do.
    Mr. Greenwood. Well, yes, but you certainly had an interest 
in keeping the client. And wouldn't it seem to be the case that 
had V&E reviewed its own work and/or had V&E sought outside 
counsel to review its own work, that outside counsel 
recommended to V&E that--or advised Enron, I should say, that 
V&E had given it less than adequate counsel, that it certainly 
might have threatened your interest in keeping your largest 
client, would it not?
    Mr. Dilg. Again, we were not being asked to review our own 
work. We were being asked to conduct a preliminary review to 
see whether a further, more extensive forensic review was 
necessary. Ms. Watkins was raising matters that were well known 
to a number of executives in the company and transactions that 
had been approved by the Board of Directors of the company.
    We were not being asked to review the quality of the legal 
work on any of the transactions, and I am not sure that there 
has been any--in any of the materials that I have seen any 
allegations that the legal work in putting the transactions 
together had any infirmities.
    Mr. Greenwood. Well, here is what the Powers Report notes. 
``The result of the V&E review was largely predetermined by the 
scope and the nature of the investigation and the process 
employed. The Powers Committee identified the most serious 
problems in the Raptor transactions only after a detailed 
examination of the relevant transaction, and, most importantly, 
discussions with our accounting advisors, both steps that Enron 
determined and V&E accepted would not be part of V&E's 
investigation.''
    ``With the exception of Watkins, V&E spoke only with very 
senior people at Enron and Andersen. Those people, with few 
exceptions, have substantial professionalism and personal 
stakes in the matters under review. The scope and process of 
the investigation appear to have been structured with less 
skepticism than was needed to see through these particularly 
complex transactions.''
    That is what Powers said, which is quite different from 
what you have just said. How would you respond to the Powers 
Report's assertions?
    Mr. Dilg. I think it is important to understand the 
difference in the scope and purpose of the special committee 
formed by the Board of Directors shortly after our report was 
delivered. It was in response to an SEC inquiry as well as 
derivative suits being filed against the company and had a much 
broader scope as far as looking at overall related party 
transactions.
    We were making a preliminary review of the matters raised 
by Ms. Watkins, which both in her letter and when we 
subsequently interviewed her, primarily related to the Raptor 
transactions. I think that is consistent with what the Powers 
Report says that she told Mr. Lay. And to make sure that Mr. 
Lay, in coming back in as CEO, understood the serious business 
issues they had with the Raptor transactions.
    She raised questions as to the accounting. The company's 
Audit Committee had chosen Arthur Andersen as their 
accountants. We wanted to make sure in our review that Arthur 
Andersen had the proper facts, that they had all of the facts 
that they needed to make the review, and that they were 
comfortable with their accounting decisions. But we were not in 
a position to second-guess Arthur Andersen's ultimate 
professional judgment on the accounting issues involved.
    Mr. Greenwood. Well, you may not have been in a position to 
second-guess the details of the accounting firm, but you 
certainly had a responsibility to protect the company from 
liability, did you not? The company has faced 77 lawsuits as a 
result of these partnerships and the demise of the company, and 
I can't quite understand why it is that V&E would take the 
position that it didn't have some responsibility to its client 
to examine the potential risk that these transactions imposed 
in terms of civil liability.
    Mr. Dilg. I think we, both in our oral conversations with 
Mr. Derrick and Mr. Lay, and in our written report, pointed out 
the risk that these transactions posed in connection with 
shareholder litigation, as far as the ability of a potential 
plaintiff's lawyer, etcetera, to paint these transactions in a 
very bad light. I think we picked up references that we had had 
in some of our interviews to bad cosmetics, if you will.
    Again, the focus of the review was to determine whether 
there were additional facts that were not known at that time 
that warranted further investigation. We did not find that any 
of the individuals that Ms. Watkins said to check with to see 
if she was all wet had any additional facts, or felt that there 
were any additional facts that weren't known at that time to 
make sure Mr. Lay knew how to address the transactions.
    Mr. Greenwood. Well, let us talk about bad cosmetics. 
During the course of your inquiry, you interviewed Jeffrey 
McMahon. In the summary of Mr. McMahon's first interview on 
August 30, 2001, with you, you note that he indicated that some 
bankers thought there might be linkage between investing in LJM 
and future business with Enron.
    In his second interview with you conducted on October 18, 
2001, a few days after you submitted your report, Mr. McMahon 
told you of specific instances where investment bankers 
complained to him of being pressured to invest in LJM 
transactions, or were promised Enron business if they invested 
in LJM.
    Mr. McMahon identified specific institutions--First Union, 
Merrill Lynch, Deutsche Bank, Chase Bank--and specific bankers, 
including Paul Riddle, and provided the names of Enron 
employees who could provide additional information on this 
subject--Ben Glisan, Tim Despain, Ray Bowen, and Kelly Booth. 
This subcommittee has learned of other individual bankers who 
have complained.
    In your October 15, 2001, letter to Mr. Derrick, you wrote, 
``The second potential conflict of interest identified by 
several individuals was that investors in LJM may have 
perceived that their investment was required to establish or 
maintain other business relations with Enron. Although no 
investors in LJM were interviewed, both Mr. Fastow and Mr. 
McMahon stated unequivocally that they had told potential 
investors that there was no tie-in between LJM investment and 
Enron business.''
    Your description of what you had learned appears to be 
highly misleading. Mr. McMahon clearly indicated in his first 
report that some banks--that there was a linkage, and that 
someone at Enron had made these promises. Presumably, given his 
position, it was Mr. Fastow. But you make it appear as if they 
are both shooting down this allegation when, in fact, it was 
Mr. McMahon who raised the allegation. And he clearly had names 
of individuals and banks as set forth in the summary of the 
second interview.
    Based on the facts you knew at the time you submitted the 
report, why isn't your description misleading?
    Mr. Dilg. I don't believe our description is misleading, 
Mr. Greenwood. We did want to alert the company to the concerns 
raised, I think both by Ms. Watkins and Mr. McMahon, that they 
had heard that there was linkage. Mr. McMahon told us that he 
had told any banker that asked him that there was no linkage. 
Mr. Fastow also adamantly denied any linkage.
    The concerns we heard raised were some people within 
investment banking and commercial banking institutions 
grumbling because they didn't get deals that they thought they 
were supposed to get because they invested in LJM, which 
indicated----
    Mr. Greenwood. Did you ask those bankers if, in fact, they 
had been made promises or had threats made against them?
    Mr. Dilg. We did not.
    Mr. Greenwood. Why is that?
    Mr. Dilg. We did not interview anyone outside the company 
at this point in time.
    Mr. Greenwood. They just took the words of the--Sherron 
Watkins has these allegations about Fastow and other people 
wearing two hats, conflicts of interest. You go to them and 
basically say, ``Do you have conflicts of interest? There are 
allegations that bankers felt that you were squeezing them on 
these deals. Did you do that?'' They say no. You go to the 
bankers and say, ``We heard you had complaints. What was your 
experience with Fastow that caused you to complain?'' You 
didn't do that?
    Mr. Dilg. We didn't interview anyone outside of the company 
in connection with our preliminary review. Mr. McMahon had 
indicated to us in the initial interview that he was not aware 
of any situation where a banking arrangement looked unusual. 
Again, both Mr. McMahon and Mr. Fastow denied there was any 
linkage, or at least Mr. Fastow denied there was any linkage. 
Mr. McMahon said he told the banks there was no linkage.
    His information that he gave to us after we had submitted 
our report was more detailed. Within I think a week--I am not 
positive on the date--but within a very short period of time 
after that interview, Mr. McMahon was the chief financial 
officer of the company in charge of all of the banking 
relationships.
    Mr. Greenwood. My time has expired. But did you ask Mr. 
McMahon for the names of these individuals that he complained 
about to begin with, in the first interview?
    Mr. Dilg. I can't recall that we did.
    Mr. Greenwood. Didn't that raise any red flags with you 
that would cause you--I mean, I am trying to understand why the 
first thing you wouldn't have done, the next thing you would 
have done was say, ``Oh, my God,'' pick up the phone, call 
these bankers, and say, ``I am supposed to protect this company 
from liability, and there is a lot of liability that could 
result from these allegations if these allegations are true.''
    I don't understand why you didn't feel a responsibility to 
Enron and stockholders to make those calls right away and find 
out what was really happening, not just taking Andy Fastow's 
word for it.
    Mr. Dilg. You have to understand, Mr. Chairman, that in the 
context that the preliminary review was conducted, Mr. Skilling 
had just resigned from the company. There was a great deal of 
speculation in the market and with Enron's counter parties as 
to the reasons for Mr. Skilling's resignation. We were trying 
to develop the facts that we could by talking with people 
inside the company so as not to create lots of speculation and 
rumors until we knew what we could report to Mr. Derrick.
    Again, the people that we interviewed indicated that they 
had seen no business arrangements that were contrary to Enron's 
best interest coming out of this, or any indication that banks 
were getting more favorable deals than they should have gotten 
due to a linkage with LJM. And the person in charge of the 
banking relationships at that point in time denied there was 
any linkage.
    Mr. Greenwood. Well, it sounds like what you are saying is 
that the preliminary review also had, as part of its purpose, 
not just a preliminary review but you didn't--this was to be a 
hushed review because of the concern that Skilling's departure 
created a lack of confidence in the company. And if you took 
the review outside the walls of Enron, that to really get to 
the bottom of it, that it would have some negative short-term 
consequences for Enron when, in fact, what you might have done 
is prevented some very, very serious long-term consequences.
    My time has expired. The Chair recognizes the gentleman 
from Florida, Mr. Deutsch, for 10 minutes.
    Mr. Deutsch. Thank you, Mr. Chairman. I am going to read 
just a couple of sentences from Ms. Watkins' letter. ``Looking 
at the stock we swapped, I also don't believe any other company 
would have entered into the equity derivative transaction with 
us at the same prices without substantial premiums from Enron. 
In other words, the $500 million in revenue in 2000 would have 
been much lower.''
    Which is really the contention that I have said in terms of 
the fact that these transactions did not serve a business 
purpose. And if we accept her premise, that is the issue.
    And, you know, as I mentioned in the introduction, Mr. 
Derrick, if you can comment, you know, on the Rhythms 
transaction, just the structure of it, as a general partnership 
set up to sell back to Enron the stock--I mean, the outside--if 
they had done that with an investment bank there would be no 
question that they can do it. But setting this up as an off 
balance sheet, were you personally involved with approving this 
or involved with understanding it?
    Mr. Derrick. No, Congressman. I had no personal involvement 
in the structure. That would have been--in terms of the legal 
work with respect to that, that would have been done by the 
lawyers who I think at that time were in Enron North America. 
And, of course, the business aspects of that would have been 
handled by the business individuals who were part of 
structuring the transaction, but I had no personal involvement 
in that.
    Mr. Deutsch. So you--again, we are trying--today's hearing 
was--the purpose of sort of trying to, you know, have the top 
dogs, you know, in front of us. So it would not have come to 
your attention. I mean, specifically, is there anyone here--you 
know, again, Mr. Astin, would you be aware of who would have 
approved this?
    And, Mr. Derrick, I mean, who specifically--so our staff at 
least can follow up. I mean, who specifically would have 
approved the structure of this transaction?
    Mr. Derrick. Well, from the Enron side, Congressman, I 
can't say with certainty. I would think that it would have been 
Ms. Mordaunt or someone in the legal group in which she was 
involved who was working with Ms. Mordaunt.
    And let me make it clear that I was at the Executive 
Committee--well, I am sorry. I was at the--I would have been at 
a Board meeting in which that was presented, so I don't mean to 
say that I have not heard of this matter. But in terms of 
having any detailed knowledge about it, or having been 
personally involved in the structure of it, I was not.
    Mr. Deutsch. Mr. Sefton, as a former General Counsel as 
well, I mean, are you aware of the--who approved this 
transaction, or any--or the structure of it?
    Mr. Sefton. This transaction was completed before I started 
my position in Global Finance.
    Mr. Deutsch. And Mr. Astin?
    Mr. Astin. Congressman, I had a very limited role in 
providing some initial securities disclosure-related advice to 
Ms. Kristina Mordaunt, with regard to this transaction. I did 
not work on the structuring of it. I did review the first draft 
or so of a partnership agreement, just to----
    Mr. Deutsch. So who at Vinson & Elkins would have approved 
this transaction?
    Mr. Astin. No one. We didn't work on the transaction except 
as I have described.
    Mr. Deutsch. And would that be typical, that in-house 
counsel would have basically--so now we are looking for Mrs. 
Mordaunt, and our staff at least can question her. I mean, is 
she, on her own, the person who basically said--you know, gave 
it the, you know, legal Good Housekeeping Seal of Approval that 
it is okay. Mr. Derrick?
    Mr. Derrick. Well, again, I don't--specifically, with 
respect to this transaction, I don't know, Congressman. Let me 
say under our corporate governance rules, every transaction 
that would have constituted a binding obligation on the part of 
Enron would have required the signoff, and should have the 
initials of, the attorney who approved that transaction.
    Now, in many of our transactions, not literally every one, 
but in many of our transactions there would have been an 
outside firm also working with the in-house group. As Mr. Dilg 
just pointed out, Enron used a great many law firms. I don't 
know whether another law firm was specifically involved in this 
transaction or not.
    Mr. Deutsch. All right. And, again, this is one of 4,000 
partnerships. It is one of the largest. It is not the largest. 
As you well know, you booked--or Enron booked a $390 million 
gain on the Rhythms stock. So it is not a small, you know, 
transaction. I mean, it--so I guess I--if you are not aware, 
you are not aware. You are not aware of any specific outside 
counsel that would have been involved in this transaction.
    Mr. Derrick. No, I am not. But that is not to say that that 
information is not available. It certainly should be.
    Mr. Deutsch. Do you understand this transaction and how it 
was set up?
    Mr. Derrick. No, Congressman, I can't explain the 
transaction, because, again, I had no personal involvement in 
it.
    Mr. Deutsch. I don't know if I want to ask you to give a 
legal opinion, because maybe I can, you know, explain it a 
little bit. Let me go more specifically as part of this--Mr. 
Fastow, who obviously remained as the chief financial officer, 
was also the general partner. My understanding is that at the 
Board meeting it was the understanding of the Board that he was 
not to receive any compensation for his work as the general 
partner. Is that your understanding as well?
    Mr. Derrick. Well, I would have to look at the minutes of 
that Board meeting specifically to truthfully answer that 
question.
    Mr. Deutsch. Was there any objection to him receiving 
compensation as general partner to these types of transactions?
    Mr. Derrick. The only Board meeting at which I was in 
attendance related to the LJM1 transaction, which I believe was 
the hedge of the Rhythms transaction. And I do believe that 
there was a discussion by Mr. Fastow of the proposed 
compensation structure and that attached to the minutes of that 
meeting would be a slide which does explain whatever was 
explained at the meeting with respect to his proposed 
compensation.
    Mr. Deutsch. Were you aware of the conflict of interest 
role that Mr. Fastow had regarding his role in LJM 
partnerships?
    Mr. Derrick. Yes. And the very purpose of presenting that--
well, let me say, as you undoubtedly know by now, under the 
Enron code of conduct, our code of ethics, conflicts of 
interest are not prohibited. It is provided--there is a 
procedure provided in the code of conduct that requires that a 
conflict of interest be presented to the chairman and chief 
executive officer. It actually is not required to be presented 
to the Board, although in this case it was.
    And the very purpose of having that discussion, as I 
recall----
    Mr. Deutsch. All right. So, really, you were trying to put 
in a meaningful system to put in place to guard against 
potential conflicts of interest with Mr. Fastow.
    Mr. Derrick. Exactly. That is right.
    Mr. Deutsch. And it was a serious conflict that you 
expected and a suitable system was supposed to be in place?
    Mr. Derrick. Well, with respect to LJM1, I was not present 
at the Board meetings where the LJM2 structures were discussed. 
As I recall, LJM1, Congressman, was actually looked at as a--at 
the time as basically one transaction to put in place a hedge 
to protect the value of the company.
    Mr. Deutsch. How was the conflict system supposed to 
operate?
    Mr. Derrick. Under our code, any employee who has a 
conflict of interest is required to present that to the 
chairman and chief executive officer. It is then up to that 
individual to make whatever decision he or she believes is 
appropriate. There is no formal requirement for it to be sent 
through----
    Mr. Deutsch. I am asking questions because--again, I have 
10 minutes, so I really do need----
    Mr. Derrick. I am sorry.
    Mr. Deutsch. [continuing] to go relatively quickly. Let me 
just ask you, in the LJM deals, there was a structure where 
there is a multi-name signature block. Why was that set into 
place? And, again, the specific information we have now is that 
it was not followed through on a continuous basis. That Mr. 
Skilling specifically did not sign, you know, continuously 
those approval sheets, and yet the transactions were approved.
    Mr. Derrick. I will have to defer, in large part, I think 
to the lawyers in the Enron Global Finance Group who were 
charged with that. I don't recall having any specific 
involvement in setting up those approval sheets. And I don't 
recall at the time that the Rhythms transaction was being 
discussed, Congressman, that there was such an approval sheet.
    Mr. Deutsch. Did you understand the system that it was 
supposed to include these approval sheets?
    Mr. Derrick. At the time of the Rhythms transaction, there 
was no approval sheet.
    Mr. Deutsch. What about LJM2?
    Mr. Derrick. As LJM2 was developed, my understanding is 
that the Enron Global Finance Group, in conjunction with----
    Mr. Deutsch. The bottom line is, did you know that these 
approval sheets were part of the system that you had supposedly 
implemented to avoid conflict?
    Mr. Derrick. Yes, at some point.
    Mr. Deutsch. Okay. And did you know that Mr. Skilling did 
not sign them on a continuous basis?
    Mr. Derrick. My first awareness of that came in my 
conversations with Mr. Mintz, who raised the issue that there 
was not contemporaneous----
    Mr. Deutsch. So who was guarding the store? Who was the cop 
watching what was going on? I mean, not internally, not 
externally. I mean, you set up a system which apparently no one 
followed.
    Mr. Derrick. Well, I think that--I am not sure that that is 
correct, Congressman. There was a system that was set up, I 
think, designed in good faith to deal with these issues. The 
question that everyone was looking at is: was the system 
appropriately adhered to? But that responsibility was allocated 
by the Board to Enron Global Finance Legal, as well as to our 
chief accounting officer and our chief risk officer.
    Mr. Deutsch. Let me go back to the--do you have the chart 
again? Let me just go back to it. Just because, again, we are 
not--sometimes I just have found it easy to focus on the 
specific transaction. I am going to do my best to try to 
explain this, that on the Rhythms transaction, as I said, the 
stock value went up about $390 million is my understanding. 
Enron made a corporate decision to basically lock in the price, 
they wanted to buy it put to do that.
    Mr. Fastow set up the partnership to sell that put back to 
Enron. It was capitalized by Enron stock right here. As soon as 
he set up the general partnership, he took out a several 
million dollar general partnership fee. That was actually the 
first thing that he did.
    He then sold the put back--actually, the general 
partnership set up a swap as a subsidiary, which was actually 
done improperly, because by taking out the general partnership 
fee it had less equity than was needed for a 3-percent set-
aside. But they sold it back.
    The problem with the transaction is two things. One is the 
general partnership never could have made good on the put. I 
mean, basically, Enron bought a put from itself in this 
transaction. And, effectively, that is what occurred. And that 
is the point of what I am saying that we--that at least in my 
opinion this transaction is illegal. It is illegal because a 
business purpose is not there.
    The business purpose--the purpose, as far as I can see, is, 
No. 1, to enrich Mr. Fastow as the general partner to take the 
fee, No. 1. No. 2, to basically manipulate the stock price, 
because what you have done is you have booked the gain, the 
$390 million gain. The liability that that stock might go down 
is not listed as a liability anywhere.
    So this is the point, you know, of why it is legal and 
where the problem comes in--is that an outside auditor, or 
someone--the public, an analyst--looking at the books, unless 
they can get inside of this transaction, does not understand 
what occurred. And I can't, you know, for the life of me--and 
no one--and I have used this chart with other people to try to 
come up with, why is this a legitimate transaction?
    What is legitimate about this, except maybe, you know, if 
this was, you know, Goldman Sachs, then it would be legitimate, 
because they would be selling a put. But Mr. Fastow didn't go 
to Goldman Sachs to buy the put. He bought the put from 
himself. And, in fact, what continues in this transaction is 
that it was capitalized, as I said, by Enron stock, literally 
given by Enron stock, when both the Rhythms net and Enron stock 
went down without consideration.
    Enron then gave, at Mr. Fastow's request, an additional--I 
believe it is $150 million of additional stock to this general 
partnership without consideration. Without consideration. 
Without showing that as a liability on the balance sheets. And, 
again, what is significant about this, as we have delved into 
these partnerships, is basically this is one of many. I mean, 
this is one of the largest. It is not the largest. And this is 
the structure.
    Again, we talked about how Enron did all of these 
complicated things. This is not so complicated. It really isn't 
that complicated. And this is the structure, apparently, that 
was continuously used by Mr. Fastow in the LJM partnerships. 
Very similar. There were different products. You know, it could 
have been a pipeline that had a value, and they locked in the 
pipeline.
    But essentially, I mean, our understanding is this was a 
game. And, I mean, from your perspective as general counsel, I 
don't see how you weren't aware that this was the game. And if 
it was the game, then try to explain to me why it was a legal 
game and why this whole thing was not a scam from day one, why 
it wasn't, you know, basically thieves in blue suits and red 
ties. And, really, that is what this whole thing is about.
    And I think that is the question which is going on, because 
the issue that I think we go back to is Enron's demise is not 
business as usual in America. There have been several companies 
since Enron's bankruptcy in America that have gone bankrupt. K-
Mart has gone bankrupt. Other companies have gone bankrupt. Big 
companies. Not as big as Enron, but the reality is that the 
public markets knew that there were problems with those 
companies.
    The reality is in the case of Enron, until Enron vaporized, 
the public markets did not really know of the level problem. 
So, Mr. Derrick, I really want to at least give you the 
opportunity, because if you can--if you can respond.
    Mr. Derrick. Well, Congressman, I will attempt to respond 
to the best of my ability. As I mentioned earlier, I was not 
involved in the structure of that transaction, and I can't 
speak to the details of it. I will say, to the best of my 
recollection, that it was certainly considered at the time that 
the Board approved that there was a legitimate business 
purpose, and that was to help ensure that the shareholders of 
Enron would be able to retain as much value as possible with 
respect to the investment that had been made in Rhythms.
    As to what later transpired, I can't speak to that. I have 
not certainly been told, and was not aware, that these 
structures had been considered to be illegal. I know that there 
are great concerns with respect to the appropriate accounting 
treatment, but I was not aware that anyone had challenged the 
actual legality of the----
    Mr. Deutsch. Is that within Enron or within your outside 
counsel, or am I the first person to suggest to you that they 
are illegal?
    Mr. Derrick. Well, I don't claim to have read everything 
that may be out there, Congressman. But my understanding is 
that the concern here has been primarily related to whether the 
appropriate accounting treatment was followed----
    Mr. Deutsch. Is it an SEC violation to have a non-business 
purpose in terms of that? That that is a violation? That is a 
criminal violation?
    Mr. Derrick. Well, again, my----
    Mr. Deutsch. I mean, if it is a non-business purpose, it is 
a criminal violation. People will go to jail.
    Mr. Derrick. My understanding at the time that the Board 
approved this was that it was certainly considered to have a 
legitimate business purpose--that is, to protect the value of 
the Enron shareholders and their investment in Rhythms.
    Mr. Deutsch. Okay.
    Mr. Greenwood. The time of the gentleman has expired.
    The Chair recognizes the Chairman of the full committee, 
Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Dilg, on October 30 when Sherron Watkins met with Ken 
Lay and provided him with the memo that we have as a part of 
our record, she listed two mistakes, apparently. One was that 
Lay should have appropriately taken the matter seriously in the 
beginning of the investigation. However, mistake No. 2 she 
lists, ``is that he relied upon V & E and Arthur Anderson to 
opine on their own work.'' And she quotes your statement on 
October 16 to her when supposedly Sherron Watkins said to Lay 
that he should probably come clean and admit the problems and 
restate the 2000 Raptor in order to preserve his legacy and 
possibly the company. And your statement was, are you 
suggesting that Ken Lay should ignore the advice of his counsel 
and the auditors concerning this matter? She was apparently 
complaining when she went to Mr. Lay, he made the mistake and 
relied upon the very same law firm that had done the work on 
these transactions, to comment on their work and to comment on 
the criticisms of that work instead of hiring outside counsel 
and outside auditors and that you indicated to her that Ken Lay 
should simply continue to take the advice of his counsel and 
his auditors concerning this matter.
    Was that an accurate statement to Mr. Lay on October 30?
    Mr. Dilg. I don't have a copy, I don't believe, of that 
memorandum Chairman Tauzin.
    Chairman Tauzin. I'll put it in front of you right now.
    Mr. Dilg. Thank you very much.
    Chairman Tauzin. I have the cite, but here's an actual copy 
and you can see where I've underlined it. She's basically 
saying it was a great mistake for him to end up relying upon 
your firm, to comment on your firm's work. And that you said, 
are you telling me that Ken Lay shouldn't rely upon his counsel 
and his auditors? Is that accurate?
    Mr. Dilg. I don't remember making that specific statement.
    Chairman Tauzin. You do remember, however, filling a report 
out on October 15 that you and I believe Mr. Mark Hendricks, 
III, prepared for Mr. Derrick. Is that correct?
    Mr. Dilg. Yes sir.
    Chairman Tauzin. And in that report your conclusions are 
that your ``preliminary investigation do not, in our judgment, 
warrant a further widespread investigation by independent 
counsel and auditors.'' Is that correct?
    Mr. Dilg. That's correct.
    Chairman Tauzin. Do you stand by that decision?
    Mr. Dilg. Yes sir.
    Chairman Tauzin. You also say that while there's some bad 
cosmetics involved that your response to the response of Mr. 
Derrick should be to Ms. Watkins that ``we should assure her 
that her concerns were thoroughly reviewed, analyzed and were 
found not to raise new or undisclosed information given serious 
consideration.'' Is that correct?
    Mr. Dilg. Yes sir.
    Chairman Tauzin. But if we look at the beginning of your 
report and this is where I want you to comment, Mr. Derrick, 
because this is a letter to you, and obviously the ``you'' in 
this sentence refers to you, Mr. Derrick.
    In preliminary discussions, the second page of the report, 
in preliminary discussions with you, it was decided that our 
initial approach would not involve the second guessing of 
accounting advice and treatment provided by Arthur Anderson, 
that there would be no detailed analysis of each and every 
transaction and there would be no full-scale discovery style 
inquiry. Instead, inquiries should continue to determine 
whether the anonymous letter and supplemental materials raise 
new factual information that would warrant a broader 
investigation.''
    Isn't it true, Mr. Derrick, that while Mr. Dilg is writing 
a report advising you to tell Ms. Sherron Watkins that you've 
given her complaints thorough--I want to quote you accurately, 
``thoroughly reviewed, analyzed'' although you were being told 
by Mr. Dilg to tell Ms. Watkins that her complaints were 
thoroughly reviewed and analyzed. But nevertheless, you gave 
instructions to Mr. Dilg and Vinson & Elkins not to do that. 
You told them, according to his, letter, don't look at the 
accounting treatment, don't look at these transactions in 
detail and for heavens sake, don't do a full style discovery. 
Isn't that correct?
    Mr. Derrick. Chairman Tauzin, if I understand your question 
correctly, this goes to the point that I was speaking to in my 
opening remarks which is in the context of last August, recall 
that as the Powers Report indicated, despite the fact that 
there were literally hundreds of people who were involved in 
these transactions and despite the fact that under the Enron 
Code of Conduct, there are three different ways of reporting 
anonymously any concerns that one may have to the company which 
does trigger an investigation.
    To the best of my knowledge, the only report that had been 
presented on this issue was that at the time it was an 
anonymous report. We took this extremely seriously. The 
question was at the time do we launch into--and this was not 
something I instructed Vinson & Elkins. This was part of our 
initial discussions.
    The question was how do we, as promptly, as practical----
    Chairman Tauzin. Mr. Derrick, Sherron Watkins met with Mr. 
Derrick and Mr. Rogers, 3 days before the 15th. You can't 
possibly sit here and tell me that you thought this was still 
an anonymous complaint.
    Mr. Derrick. I'm saying at the time that we received the 
initial report, it was an anonymous letter. Obviously, at some 
point and I can't recall exactly which day that would have 
been, but yes, at some point we certainly understood it was Ms. 
Watkins, but I don't know her.
    Chairman Tauzin. I want you to explain to us, because I'm 
totally--I can't understand for the life of me why the general 
counsel of this corporation, when he's approached by Ken Lay, 
when Sherron Watkins meets with you, Mr. Rogers, to go over all 
this stuff, not anonymous any more, why you when asked to 
considered her request that outside counsel, she says this is 
our recommendation in an initial letter. Involve Jim Derrick 
and Rex Rogers to hire a law firm to investigate the Condor and 
Raptor transactions to give Enron attorney-client privilege on 
this work product, can't use V & E due to conflict. They 
provided some true sale opinions on these deals. Why, when Mr. 
Lay comes to you and says I need to know whether all this is 
true, why you turn right around and get Vinson & Elkins to do 
this extraordinarily limited investigation and instruct them 
don't look at the accounting treatment and don't do a full-
scale discovery style inquiry and by the way, I should look at 
the next paragraph where Mr. Dilg, you point out that you only 
looked at selected documents, provided you by Enron.
    It appears to me, Mr. Dilg, Mr. Derrick was severely 
limiting your ability to examine whether or not, No. 1, Sherron 
Watkins' allegations were correct, because you were told not to 
look at them. And two, whether anybody else really ought to 
look over your shoulder and see whether or not Vinson & Elkins 
had done a good job in recommending these deals when you issued 
approval letters on them.
    Is that correct?
    Mr. Dilg. I don't believe that we were instructed to be 
limited, Chairman Tauzin.
    Chairman Tauzin. I'm reading your statement, Mr. Dilg. 
Listen, let me read it again. ``In preliminary discussions with 
you, Mr. Derrick, it was decided''--sounds like both of you 
talked about it and decided together that our initial approach 
would not involve the second guessing of the accounting advice 
and treatment provided by AA. And there would be no detailed 
analysis of every transaction. And there would be no full-scale 
discovery style inquiry. And second, that you would only review 
selected documents. You're trying to tell me that wasn't an 
extraordinarily limited review of Sherron Watkins' complaints?
    Mr. Dilg. I think the sentence you read did talk about our 
initial approach and again the scope of our review was to 
determine whether a further, more detailed----
    Chairman Tauzin. How could you know whether a further 
review would be required if you wouldn't even look at her 
allegation? How could you, the attorneys who advised the 
corporation on these deals, how could you possibly give the 
company objective information as to whether or not an outside 
counsel or an outside auditor ought to look at them if he never 
even looked at the deals again?
    Mr. Dilg. Ms. Watkins was raising some very serious 
business concerns that she wanted Mr. Lay to review and be 
aware of. We didn't feel that that involved and there is 
nothing in her letter----
    Chairman Tauzin. Did you even bother to interview Skilling?
    Mr. Dilg. Mr. Skilling was no longer with the company.
    Chairman Tauzin. But you never tried to interview him?
    Mr. Dilg. No sir.
    Chairman Tauzin. You never asked him about the so-called 
handshake deal where he promised that the partnership would be 
protected with Enron stock, they would never lose money?
    Mr. Dilg. No sir.
    Chairman Tauzin. You just asked Fastow about it, he denied 
it and that was enough?
    Mr. Dilg. He denied it. If there was a concern from the 
company's standpoint, Mr. Causey said that he was not aware, I 
believe Mr. Causey said he was not aware of any such 
transaction and----
    Chairman Tauzin. Ms. Watkins says that employees were 
asking this all the time, that people were saying that, that 
many similar comments are made when you ask about these deals. 
Employees quote our CFO as saying these are handshake deals. 
But Skilling and LJM will never lose money. Did you ever try to 
find out who these employees were who said that Fastow actually 
told them that he had such a handshake deal?
    Mr. Dilg. We did interview Ms. Watkins and she said a lot 
of it was rumors that she had heard. She did give us some names 
of other people that we should talk to on this specific aspect.
    Chairman Tauzin. Did you talk to them?
    Mr. Dilg. We did not.
    Chairman Tauzin. You didn't bother chasing down that 
allegation. You didn't talk to Mr. Skilling. You lived by Mr. 
Derrick's and your agreement not to look at the deals, not to 
do any discovery-style inquiry and you reported quite 
conveniently to Mr. Lay and Mr. Derrick that everything is 
okay, just cosmetic and tell Ms. Watkins that we looked at 
everything and she should go away. In fact, you did more than 
go away. This is a remarkable piece. This is a memo--Mr. 
Derrick, I want to ask you about this one. This is from someone 
who works in your office. This is from Ms. Sharon Butcher. It's 
to Sharon Butcher from Vinson & Elkins from Carl Jordan, but 
the letter is per your request. Some way or another, someone 
who worked for you, Sharon Butcher, made a request to Vinson & 
Elkins and she made two requests apparently. ``Per your 
request, the following''----
    Mr. Greenwood. It's Tab 4 in your books in case you need 
to----
    Chairman Tauzin. Tab 4 in your books. From Carl Jordan, 
August 24, 2 days after--I mean this is right about the time 
all this is coming about, to Sharon Butcher in your office, Mr. 
Derrick. Which says, ``per your request, Sharon'', so Sharon 
must have asked for this information. ``Here are some thoughts 
on how to manage the situation with the employee who made the 
sensitive report'' and there are all kind of thoughts about how 
thank God she's asking for reassignment herself. You can see 
she wanted a new job. And then the second one, you also ask 
that I include in this communication a summary of the possible 
risks associated with discharging or constructively discharging 
employees who report allegations of improper accounting 
practices. Did you, Mr. Derrick, instruct Sharon Butcher to 
make such a request on Vinson & Elkins?
    Mr. Derrick. Yes, I did, Congressman.
    Chairman Tauzin. Explain to me why.
    Mr. Derrick. Well, under our Code of Conduct, any employee 
who makes an anonymous report is guaranteed that there will be 
no retribution by the company, that the company will not 
tolerate any form----
    Chairman Tauzin. Why did you need the lawyers to tell you 
what the risk of doing something you knew you couldn't do?
    Mr. Derrick. We wanted to be absolutely correct in every 
way----
    Chairman Tauzin. That's a fine answer. You want to be 
absolutely correct. But let me ask you again what I asked you. 
If you already knew that your code of ethics prohibited you 
from discharging her, why on earth would you instruct one of 
your employees to ask Vinson & Elkins about what would happen 
if you did that, what the risks were to the company, including, 
for example the SEC might have some questions about that and 
that you might have problems with other oversight agencies of 
the government if you did that. Why would you even want to ask 
Vinson & Elkins to give you a list of all the horrible things 
that would occur if you knew you had no right under your own 
code of ethics to discharge this employee?
    Mr. Derrick. That gives us any information that we would 
need, Congressman, as a legal department, in order to be in the 
best position to protect any potential harassment or 
intimidation of Ms. Watkins. We had absolutely nothing other 
than her interest and the company's interest in acting properly 
in this regard. Not only was that the right thing----
    Chairman Tauzin. Mr. Derrick, you came from Vinson & 
Elkins, didn't you?
    Mr. Derrick. I certainly did.
    Chairman Tauzin. So you're the lead counsel for Enron. The 
guy Mr. Lay turns to to get help with these allegations.
    Mr. Derrick. Correct.
    Chairman Tauzin. Formerly with Vinson & Elkins. You turn 
back to Vinson & Elkins to investigate it, but you tell them 
don't look too hard. That's the common sense review of what 
I've just read to you.
    How do you explain that?
    Mr. Derrick. I would respectfully disagree with that 
construction, Congressman. As I mentioned, Mr. Lay and I both 
proceeded in absolute good faith to take Ms. Watkins' 
allegations extremely seriously. What you were pointing to as 
the downside of Vinson & Elkins was also the great strength of 
Vinson & Elkins----
    Chairman Tauzin. Why did you tell them not to look at the 
deals--why did you tell them not to do a thorough discovery-
style inquiry? Why did you tell them not to do that?
    Mr. Derrick. Let me say again I did not instruct them to do 
that. That was part of our initial discussion in how best to 
proceed with a preliminary investigation. It was always the 
purpose of this investigation that the recommendation to engage 
an additional accounting firm could well have been made.
    Chairman Tauzin. My time is up, but I want to make it 
clear. You call this a preliminary investigation, but it's the 
only one you did, right? It's the only one Vinson & Elkins did, 
the only one you did, right?
    Mr. Derrick. We followed the recommendation that we 
received from the outside firm----
    Chairman Tauzin. From Vinson & Elkins saying we don't think 
anybody ought to overlook our work and check it. Did that 
surprise you that Vinson & Elkins would tell you we don't think 
anybody has to look at what we did to see if it's legally 
correct?
    Mr. Derrick. I have the utmost faith in Vinson & Elkins and 
in their integrity. I believe that they had truly believed that 
we should have proceeded----
    Chairman Tauzin. You knew that Vinson & Elkins were the 
attorneys on the Raptor deal.
    Mr. Derrick. As I said, Congressman, I don't know that I 
was aware that they were attorneys on all the deals, but we 
were certainly aware that they had been involved in the 
transactions which gave them the great ability to quickly start 
on the investigation.
    Mr. Greenwood. The time of the gentleman has expired. The 
chair is about to recognize the gentlelady from Colorado, but 
before I do just one question, Mr. Dilg. Your preliminary 
investigation was not a cover up, was it?
    Mr. Dilg. It was definitely not a cover up.
    Mr. Greenwood. In what ways would a cover up look different 
than your preliminary investigation?
    Mr. Dilg. I'm not sure. I've never participated in a cover 
up, Chairman. Again, you need to take our preliminary report in 
the context of what Enron was doing at the time in terminating 
the Raptor transactions and having already removed Mr. Fastow 
from the conflict of interest position.
    Mr. Greenwood. The chair recognizes the gentlelady from 
Colorado for 10 minutes.
    Ms. DeGette. Thank you so much, Mr. Chairman. Mr. Derrick, 
I'm sure you didn't mean to imply to the chairman that you gave 
any less shrift to the allegations being made by Ms. Watkins 
because they were initially made anonymously, did you?
    Mr. Derrick. To the contrary, Congresswoman----
    Ms. DeGette. I'm serious, didn't you.
    Mr. Derrick. We absolutely did.
    Ms. DeGette. Thank you. Now also, I'm sure that when you 
asked Vinson & Elkins to do an investigation, you yourself 
didn't intend to have them do a cover up, did you?
    Mr. Derrick. My integrity is not for sale, Congresswoman. I 
would not participate in a cover up.
    Ms. DeGette. Thank you. So you thought that they would do 
an independent investigation.
    Mr. Derrick. Yes, I did.
    Ms. DeGette. Is that your testimony?
    Mr. Derrick. Yes.
    Ms. DeGette. Thank you. Now Mr. Dilg, in your written 
testimony, you point out to us very helpfully that Enron's 
legal affairs were directed by a highly sophisticated in-house 
legal department consisting of approximately 250 attorneys, 
some of which by the way, came from your organization, correct?
    Mr. Dilg. That's correct.
    Ms. DeGette. And so for most of the financial transactions, 
your lawyers would interface with the in-house attorneys and 
also, by the way, with Arthur Anderson who provided the 
auditing and accounting advice for Enron, correct?
    Mr. Dilg. We would usually interface with the legal 
department. I'm not sure that we would interface with Arthur 
Anderson.
    Ms. DeGette. You assumed that the in-house lawyers were 
interfacing with Arthur Anderson for routine transactions, 
right?
    Mr. Dilg. I'm not sure it would be the in-house counsel as 
much as it would be the in-house financial department or 
accounting department.
    Ms. DeGette. So you don't even know if the in-house lawyers 
were working with Arthur Anderson on these issues?
    Mr. Dilg. That's correct. I do not know.
    Ms. DeGette. As far as you know, there may have been no 
lawyers working with Arthur Anderson?
    Mr. Dilg. That could be.
    Ms. DeGette. Mr. Derrick, do you know if your lawyers 
worked with Arthur Anderson?
    Mr. Derrick. I can only say that I personally did not work 
with Arthur Anderson. It wouldn't surprise me----
    Ms. DeGette. You were the head of the legal department. Do 
you know whether any of your lawyers worked with them?
    Mr. Derrick. As I was going to say, Congresswoman, it 
wouldn't surprise me that on some matters there was interface 
between some in-house lawyers and Anderson. I personally was 
not.
    Ms. DeGette. If you wouldn't mind supplementing your 
answer, find out if anybody did, that would be helpful in this 
investigation.
    Now Mr. Derrick, the investigation of Sherron Watkins' 
claims, that was kind of a different assignment than the normal 
assignments that you got, wasn't it?
    Mr. Dilg. Is that question addressed to me, Congresswoman?
    Ms. DeGette. I'm sorry. Yes, it is, Mr. Dilg.
    Mr. Dilg. Yes, that was not a normal assignment as far as--
I'm a transactional lawyer.
    Ms. DeGette. Did you understand that that was to be an 
independent investigation of these claims?
    Mr. Dilg. I understood we were to make a preliminary 
review. We discussed----
    Ms. DeGette. Did you think it would be an independent 
preliminary review?
    Mr. Dilg. It depends on--it's not an independent review 
such that you would have to respond to a derivative suit or if 
you were going to have an independent committee of the board 
directing their own counsel.
    Ms. DeGette. So you didn't think it was particularly 
independent. The reason I'm asking this question is because and 
we've talked about this at length with the chairman and others, 
you limited the scope of the investigation right from the get 
go. You said that you're not going to second guess Arthur 
Anderson's accounting, right?
    Mr. Dilg. We----
    Ms. DeGette. Wasn't that one of your premises in the 
investigation?
    Mr. Dilg. In our preliminary review, we were not to review 
the accounting.
    Ms. DeGette. And in fact you never did review Arthur 
Anderson's accounting, did you?
    Mr. Dilg. No, we did not.
    Ms. DeGette. Okay, the investigation team was you and Mr. 
Hendricks only, right?
    Mr. Dilg. That's correct.
    Ms. DeGette. You didn't use any associates, right?
    Mr. Dilg. That's correct.
    Ms. DeGette. You didn't have any accountant helping you 
with the investigation, did you?
    Mr. Dilg. That's correct.
    Ms. DeGette. So you would really have no way--I mean do you 
have an accounting background?
    Mr. Dilg. I do not.
    Ms. DeGette. I don't know how you are, the way I am, before 
I went to law school I had one accounting course in college. I 
assume it's probably pretty much the same with you, is that 
right?
    Mr. Dilg. I believe I had two semesters of accounting in 
undergraduate school.
    Ms. DeGette. Okay. So you don't really understand 
complicated accounting transactions or standards, do you?
    Mr. Dilg. No ma'am.
    Ms. DeGette. Do you know whether Mr. Hendrick does?
    Mr. Dilg. I do not believe he does.
    Ms. DeGette. So the two of you, you interviewed witnesses, 
just the two of you. You never reviewed these transactions, did 
you?
    Mr. Dilg. No, we did not get into the details of the 
transaction.
    Ms. DeGette. Now you did know, didn't you, that Sherron 
Watkins' allegations were that the accounting scandals were the 
problem. Isn't that correct?
    Mr. Dilg. She raised a number of different things in her 
correspondence with Mr. Lay.
    Ms. DeGette. Right, but I mean basically she said we will 
implode in a way the accounting scandals and there's an 
elaborate accounting hoax and then her supplemental information 
indicated she thought there were accounting problems with a 
number of the transactions, most particularly Raptor, correct?
    Mr. Dilg. She was concerned about the Raptor transaction, 
primarily.
    Ms. DeGette. Right.
    Mr. Dilg. Her main concern was that Mr. Lay, in coming back 
in as CEO, thoroughly understand the issues he had with the 
business issues of the vehicles unwinding 2 years hence and the 
problems that might cause.
    Ms. DeGette. If you'll excuse me, I've looked at--I assume 
you reviewed all of her--both her letter of concern and also 
the attached specific concern she raised, didn't you?
    Mr. Dilg. Yes, we did.
    Ms. DeGette. Well, because she says here about Raptor, the 
accounting treatment looks questionable, and talks about equity 
derivatives. ``The equity derivative transactions do not appear 
to be at arm's length. There's a veil of secrecy. Employees are 
questioning our accounting propriety'' etcetera. Aren't those 
all issues around accounting?
    Mr. Dilg. Yes. All those statements relate to accounting.
    Ms. DeGette. Did you understand what those allegations 
were?
    Mr. Dilg. We understood her base allegation to be concern 
about the fact that the Raptor vehicles were supported by Enron 
stock and that Enron had hedged investments made against those.
    Ms. DeGette. Right, and she had specific concerns about 
specific transactions. Did you ever have any independent 
accountant look at those transactions?
    Mr. Dilg. We did not.
    Ms. DeGette. Now, why not?
    Mr. Dilg. Our charge for the initial review was to 
determine whether there were facts sufficient for a further 
review. We were not to review the accounting advice given by 
the accounts that Enron's audit committee had decided to use 
for accounting advice.
    Ms. DeGette. If the allegation is that the accounting is 
funny, and you rely on the accounting to come to your 
conclusion, how can you conclude that there's not a problem 
with the accounting without any kind of outside analysis?
    Mr. Dilg. We were concerned with making sure that Arthur 
Anderson had at their disposal all the material facts relating 
to the transactions and we did try to verify that.
    Ms. DeGette. And did you find that out? Did they?
    Mr. Dilg. Yes.
    Ms. DeGette. How did you find that out?
    Mr. Dilg. We gave them Ms. Watkins' letter and walked 
through with their engagement partners point by point under Ms. 
Watkins' letter and----
    Ms. DeGette. Did they have the information, so, from that 
you concluded yes?
    Mr. Dilg. They were very well aware of the issues that she 
was raising and that they felt very comfortable with the 
accounting decisions they had made in connection with the 
transaction.
    Ms. DeGette. Let me ask you this, did you ask Anderson to 
provide you a detailed analysis of the allegations that Ms. 
Watkins made in her memo, most specifically, the Raptor deals 
and the other deals? Did you ask them for a detailed analysis 
or did you just say, does this look okay to you and they said 
yes, and that was it?
    Mr. Dilg. We gave them the letter, I believe, a day or so 
before a meeting that we had with Mr. Duncan and Ms. Cash. We 
did not ask for a detailed, written analysis.
    Ms. DeGette. So you don't know to this day what Arthur 
Anderson's analysis would have been of the transactions that 
formed the basis of Ms. Watkins' concerns?
    Mr. Dilg. Arthur Anderson had included those transactions 
in the scope of their overall audit of the company and they 
confirmed to us verbally that they were still comfortable----
    Ms. DeGette. This seems like an incredible circle to me. 
She says well, there's problems with the audit, so you go ask 
the people that did the audit. They say the audit was okay, so 
it just comes back to point one.
    How could you decide independently if it was true or not?
    Mr. Dilg. We could not decide on whether the accounting was 
correct. We're not in position to do that. We could decide 
whether the Big Five accounting firm that the company's audit 
committee had decided to rely on for accounting advice were 
aware of the concerns and that they were still satisfied with 
their accounting advice.
    Ms. DeGette. But if the accounting--if the concern of the 
whistle blower is that the accounting is wrong, then how can 
you determine there's not a problem if you're relying on the 
people doing the accounting to give you the analysis?
    Mr. Dilg. I think Ms. Watkins' concerns, and I don't want 
to speak for Ms. Watkins, but based on her letter and our 
interviews were not with the technical accounting side. She 
disagreed with the concept that you could support a transaction 
with your own stock.
    Ms. DeGette. Okay, let me ask you one more question. Now 
you said here there's some problems with cosmetics. You thought 
it might look bad, right, in your report?
    Mr. Dilg. We laid out----
    Ms. DeGette. You used that word, you said that there's some 
problems with cosmetics.
    Mr. Dilg. We did use the word cosmetics.
    Ms. DeGette. But then you said you had some concerns that 
there might be litigation as a result of this, correct?
    Mr. Dilg. We had concerns that we expressed both in the 
letter and in oral conversations that in the event of the 
litigation, these transactions could be portrayed very badly.
    Ms. DeGette. Well, actually, you said that you were 
concerned that there might be litigation. Right? You said, 
``there is a serious risk of adverse publicity and 
litigation.'' That's the last page, page 9 of the October 15 
letter.
    Mr. Dilg. Yes.
    Ms. DeGette. She's handing it to you right now.
    Mr. Dilg. Thank you.
    Ms. DeGette. Did you undertake any other, any further risk 
analysis on behalf of your client, Enron, to let them know what 
those litigation risks were so that they could rely on your 
advice and conduct a narrow internal affairs?
    Mr. Dilg. We did advise the company of the litigation risk. 
Again, these were transactions that had been entered into by 
the company some 18 months to 2 years before. There had been 
serious declines in the market value of the investments that 
had been hedged against them. The company terminated these 
vehicles shortly after our initial meeting with Mr. Lay and Mr. 
Derrick.
    Ms. DeGette. Can I just stop you? We don't have any 
document that would indicate the advice you gave to Enron 
relating to the litigation risk. Does such a document exist or 
did you give that advice verbally?
    Mr. Dilg. It's here in the October 15 letter.
    Ms. DeGette. So there's no additional documentation other 
than this?
    Mr. Dilg. There was an outline, I believe that the 
committee has of our discussion of Mr. Lay and Mr. Derrick.
    Ms. DeGette. But there's no additional memo about 
litigation risk?
    Mr. Dilg. That's correct.
    Ms. DeGette. Thank you very much, Mr. Chairman.
    Mr. Greenwood. The chair thanks the gentlelady from 
Colorado and recognizes the gentleman from Florida for 10 
minutes for purposes of inquiry.
    Mr. Stearns. Thank you, Mr. Chairman. Mr. Dilg, I saw in 
your opening statement, I just re-read it, you talked about 
that you felt the lawyers that you dealt with with Enron were 
highly capable, well qualified attorneys. Then you talked about 
your relationship with Enron and you were proud of it. I think 
that's what you said in your opening statement?
    Mr. Dilg. Yes sir.
    Mr. Stearns. In hindsight, do you think there's anything 
you would have done differently dealing with Enron?
    Mr. Dilg. I do not think so.
    Mr. Stearns. So you would not have changed an iota of 
anything that you did with Enron in your advising, in your 
consulting, in your procedures with them?
    Mr. Dilg. We performed a great deal of work on very many 
projects for Enron over a long period of time. To my knowledge, 
there's nothing that I'm aware of that we would change.
    Mr. Stearns. Okay, so we've established the record that 
everything you did during that time with Enron, you would do it 
again, the same thing. Is that correct?
    Mr. Dilg. From my personal standpoint, yes.
    Mr. Stearns. This, to me is a little bit far fetched. If I 
were you, I would say look, we made some mistakes. We're sorry, 
we could have improved. There are some areas we could have 
changed. But to come up here and say there's absolutely nothing 
you would change, did you ever think about not continuing Enron 
as a client?
    Mr. Dilg. No sir, not until after the bankruptcy.
    Mr. Stearns. So it took you to the absolute meltdown of 
this corporation before you said we'll just not have Enron as a 
client. Is that true?
    Mr. Dilg. That's correct.
    Mr. Stearns. And all during that time, there were no 
indications to you that Enron was performing functions that 
were illegal in your opinion?
    Mr. Dilg. Never had any information that would indicate to 
me that Enron was performing an illegal act.
    Mr. Stearns. How much did you charge V & E for its 
investigation of the Watkins letter?
    Mr. Dilg. How much did we charge Enron?
    Mr. Stearns. How much did V & E charge Enron for the 
investigation of the Sherron Watkins letter?
    Mr. Dilg. I don't have the precise figures. I believe it's 
around $60,000. We conducted that very quickly.
    Mr. Stearns. In your testimony, you define the role of 
legal counsel. Let me just read from this. ``If a 
transaction'', you say, ``is not illegal and has been approved 
by the appropriate levels of a corporate management, lawyers, 
whether corporate counsel or with an outside firm, may 
appropriately provide the requisite legal advice.''
    So if a transaction is not illegal, not illegal and it's 
been approved by the corporate management, who determines 
whether a transaction is legal or not? Isn't that your job?
    Mr. Dilg. Based on the information we would have at the 
time we were rendering the legal services, that's certain 
advice that we would give.
    Mr. Stearns. That kind of answer gets me concerned. If I 
understand, the whole purpose of V & E is to take the facts 
that are given to you, figure out if there is a legally 
appropriate way to do it, isn't that what your law firm does? 
Anderson comes to you, we want to do this, you show them how to 
do it legally. Isn't that the whole purpose of your law firm?
    Mr. Dilg. That is the type of advice we render on certain 
matters, when we're asked. We do litigation matters. We do lots 
of different things.
    Mr. Stearns. I think every law firm in America is trying to 
advise their clients what's legal to do. And you're saying that 
you, as the counsel for Enron, never saw anything egregious 
about anything they did during the entire relationship you had 
with Enron. That's what you're telling us today?
    Mr. Dilg. Yes sir.
    Mr. Stearns. Now when Mr. Skilling came here, he gave 
pretty much the same tact you have done, you know. I used the 
term with him ``plausible deniability.''
    I don't know if that term fits you, but the approach you're 
taking here is total unrepentence, a feeling that you did 
nothing wrong and that you and your entire legal firm with all 
these high powered lawyers, never saw a red flag during the 
whole process and you never thought about separating your 
relationship with Enron until the meltdown and until the 
bankruptcy. That's what you're telling us today.
    Mr. Dilg. I believe the earlier question was whether we 
ever saw anything illegal. That's what we're qualified to 
determine. Red flag is a term that I'm not sure that I feel 
comfortable with. But then again, it's to my knowledge we never 
saw anything at Enron that we considered illegal. Our ethical 
obligations would require us to withdraw if we did and if they 
did not follow our advice in pursuing an illegal action.
    Mr. Stearns. Mr. Sefton, prior to your coming here, I had 
the opportunity to question Mr. Mintz, your successor. He 
testified that when he saw virtually identical language that 
was in the LJM2, identical language in the PPM for LJM3 in late 
2000, he became very concerned. He was alarmed, because it 
suggested that Fastow was promoting his access to inside 
information as a way to promote investment in his partnership.
    He raised his concern with Enron's legal team and V & E. 
Mr. Dilg, did you know that he raised that? Mr. Mintz raised 
that with you folks about his concern about Fastow's inside--
promoting his access to inside information? Did you ever know 
about that? Just yes or no?
    Mr. Dilg. I don't believe I recall any specific 
conversations with Mr. Mintz.
    Mr. Stearns. Mr. Sefton, did you know about Fastow and what 
he was doing? Because you prepared the LJM2 papers, didn't you?
    Mr. Sefton. No, I did not prepare those papers.
    Mr. Stearns. Didn't you review them?
    Mr. Sefton. I saw some of the documents relating to LJM2.
    Mr. Stearns. How can you see some and not the entire 
document? Do they come one page at a time?
    Mr. Sefton. LJM2 was represented by Kirkland & Ellis which 
was their outside counsel. They did essentially all the work on 
putting that deal together.
    Mr. Stearns. Well, did you review the private placement 
memorandum?
    Mr. Sefton. Yes, I did.
    Mr. Stearns. And there was no concern by you on this, even 
though your successor, Mr. Mintz, testified that he had great 
concern about the PPM for LJM3 and yet you had no concern, is 
that correct?
    Mr. Sefton. I have never discussed with Mr. Mintz the 
reasons for his concerns.
    Mr. Stearns. Mr. Skilling did not sign any of these 
documents. Should Mr. Skilling have signed some of these 
documents?
    Mr. Sefton. His signature was called for on the form, yes.
    Mr. Stearns. When I go to a closing on my home, if I don't 
sign the document, my lawyers says, ``Mr. Stearns, you better 
sign this document or the deal is not going to be credible.''
    Now your job was to review these partnerships, is that 
correct?
    Mr. Sefton. No, that's not correct.
    Mr. Stearns. Okay. Did you see these partnership 
agreements?
    Mr. Sefton. No, I did not.
    Mr. Stearns. But you just told me earlier that you saw a 
part of LJM2?
    Mr. Sefton. I saw the private placement memorandum.
    Mr. Stearns. Okay, would you have discerned whether 
Skilling signed or not that? Could you recognize in that he did 
not sign it?
    Mr. Sefton. I don't believe his signature was called for in 
connection with the private placement memorandum.
    Mr. Stearns. If you don't mind, pull the mike a little 
closer.
    Mr. Sefton. Sorry.
    Mr. Stearns. Did you sign the approval sheets for the LJM2? 
Did you sign them?
    Mr. Sefton. Yes, I did.
    Mr. Stearns. Now if you signed them that meant that you 
were approving the LJM2 partnership, is that correct?
    Mr. Sefton. That is not my understanding.
    Mr. Stearns. So when you sign a document that's the 
approval sheet, it's your understanding that that does not mean 
it's an approval sheet?
    Mr. Sefton. The approval sheet requires approval by Mr. Buy 
and Mr. Causey. Those were the two senior executive officers of 
the company who were required to approve the transactions by 
the board of directors.
    Mr. Stearns. Mr. Derrick, what was your role in helping the 
board of directors understand the LJM transactions? As general 
counsel, did you advise them on the controls they implemented 
to avoid conflicts in doing business with LJM and did you 
recommend that they implement any additional controls?
    Mr. Derrick. Congressman, the only--best of my 
recollection, the only board meeting that I was at with respect 
to the LJM was the LJM1 transaction in which was viewed as 
simply a on-off transaction. There were no controls, as I 
recall the discussion at that point, because it was already a 
deal that they were looking at specifically with a fairness 
opinion.
    With respect to the other LJM matters, I did not personally 
participate in the controls and I was not at the meetings at 
which LJM2 was----
    Mr. Stearns. Mr. Derrick, I just have a little time left. 
All of us on this committee are just having a difficult 
understanding why Mr. Skilling didn't sign these documents and 
why you, as a former general counsel of Enron didn't get a 
concern when Skilling didn't sign these documents because I 
would think part of your job as the former general counsel of 
Enron is to make sure all the documents are properly signed.
    Mr. Derrick. Well, Congressman, as we have said, we had 
almost 250 lawyers in a decentralized department----
    Mr. Stearns. You had too many people to enforce the signing 
of the document?
    Mr. Derrick. No, but the responsibility for that was 
allocated by the board to Enron Global Finance and their 
attorneys. Those were not documents that were toward me.
    Mr. Stearns. Mr. Sefton, what's your comment?
    Mr. Sefton. With respect to what?
    Mr. Stearns. Documents that Mr. Skilling should have 
signed, were not signed. Shouldn't that raise some flags?
    Mr. Sefton. Yes, and it did.
    Mr. Stearns. I mean because Mr. Derrick is saying you're 
supposed to have done it, so he's bouncing--aren't you, Mr. 
Derrick, bouncing the ball back to Mr. Sefton and saying Mr. 
Sefton was supposed to do that? Isn't that what you just said?
    Mr. Derrick. I don't mean to be bouncing balls, 
Congressman. I'm just saying the board had allocated that 
responsibility to a particular group, a legal group in our 
organization.
    Mr. Stearns. I would think the general counsel of Enron 
might be that particular group you're talking about. So Mr. 
Sefton, at this point I'm finding it hard to believe that you 
wouldn't be involved in making sure all these documents were 
properly signed.
    Mr. Sefton. I'd like to just say that it was never my 
understanding that the board delegated this job to Enron Global 
Finance legal. That was never my understanding.
    Mr. Stearns. Whose responsibility was it? If it wasn't 
yours, whose responsibility? You ere the top poobah here, the 
former--you were the counsel for Enron. I mean if you're not 
responsible, the Global Finance, who else could there be?
    Mr. Sefton. I believe the approval process called for the 
business unit that was doing the transaction to complete the 
signatures and get the signatures on the form.
    Mr. Stearns. Well, Mr.----
    Ms. DeGette. Will the gentleman yield real quick----
    Mr. Stearns. I want to finish. The general counsel, Mr. 
Mintz, I mean he tried. He said I sent him a memo in May 2001. 
I gave him about a week to respond. This is Mr. Mintz saying. I 
didn't hear from him. I asked my secretary to call his 
secretary to see if I could get him on the schedule. He tried 
and tried and tried. And Mr. Mintz was unable to get the 
signature on the approval sheets. I mean who should he have 
gone to? I mean aren't you the responsible one to help out 
here?
    Mr. Sefton. No, Mr. Mintz is my successor.
    Mr. Stearns. Yeah. I mean you weren't aware of this problem 
at all with Mr. Skilling? Are you saying today you had no 
knowledge about Skilling not signing these documents, is that 
your statement today?
    Mr. Sefton. No, I'm not.
    Mr. Stearns. You knew he didn't sign the documents?
    Mr. Sefton. I know that his signature wasn't on all the 
forms.
    Mr. Stearns. Okay, so if they weren't on all the forms, 
should they have been on all the forms? Just yes or no?
    As a general counsel, should his name have been on the 
forms, yes or no?
    Mr. Sefton. I understand that the----
    Mr. Stearns. No, just yes or no. Should they be on the 
forms?
    Mr. Sefton. Well, I'd like to answer by saying that the 
approvals required by the board of directors required approval 
by Mr. Buy and Mr. Causey and that's what the board said had to 
be done in order to approve these transactions because of the 
conflict of interest.
    Mr. Stearns. No. I'm just asking your general, your legal 
opinion here as a general counsel. Should Skilling's name have 
been on those forms?
    Mr. Sefton. The board did not call for that.
    Mr. Stearns. So they don't have to be on the forms, is that 
what you're saying?
    Mr. Sefton. The board did not recall Jeff Skilling to sign 
those forms.
    Mr. Stearns. But you just told me earlier that his name 
should have been on the forms. You just told me a moment ago.
    Mr. Sefton. His signature was called for by the form 
itself, but it wasn't required by the board procedures.
    Mr. Stearns. Didn't you create the form? Who created the 
form?
    Mr. Sefton. I did assist in preparing the form.
    Mr. Stearns. Assist, now wait a second. You created the 
form, Mr. Sefton. You asked that his name be on that form. You 
told me his name should have been on that form and it wasn't on 
the form.
    Mr. Sefton. No, I----
    Mr. Stearns. That's the facts we've just established.
    Mr. Sefton. No, I did not ask that his name be on the form.
    Mr. Stearns. Who did, because you said his name should have 
been. And you prepared the form, so who else could there be?
    Mr. Sefton. Mr. Fastow suggested that Mr. Skilling's name 
be added.
    Mr. Stearns. And did you make sure that that name was added 
in the nomenclature underneath saying blank line, Mr. Skilling?
    Mr. Sefton. Yes, I did.
    Mr. Stearns. So you had on the form that Mr. Skilling's 
name should have been there. You prepared the forms. You said 
he should have been on there. Now tell me why didn't you make 
sure it was not on the form?
    Mr. Sefton. Well, what I haven't mentioned to you is that 
when I became aware of the fact that some of the forms had not 
been signed by Mr. Skilling, I raised this issue with Mr. 
Fastow and told him that there was an issue here that we needed 
to deal with.
    Mr. Stearns. Needed to deal with is probably a good way to 
summarize this.
    Mr. Chairman----
    Ms. DeGette. Mr. Chairman, can I ask unanimous consent for 
15 seconds?
    Mr. Greenwood. Without objection.
    Ms. DeGette. Mr. Rogers, in your position, did you think 
that Mr. Skilling was supposed to sign those forms?
    Mr. Rogers. Madame Chairman, let me reach over here. This 
is pretty uncomfortable. Congresswoman, excuse me. I'm getting 
off to a bad start. I think these processes for policies and 
procedures for ensuring that these transactions with LJM were 
not adverse to the best interest of Enron and that they were 
arm's length----
    Ms. DeGette. I asked a kind of a simple question. Can I get 
kind of a simple answer? Did you think Mr. Skilling was 
supposed to sign the forms?
    Mr. Rogers. In the beginning, that was not my 
understanding.
    Ms. DeGette. Okay.
    Mr. Rogers. That was an important factor for the Board. 
When I said earlier, as these processes evolved and the in-
house counsel reviewed the policies and procedure to see how 
they could be refined and improved, it was clear to me through 
reading minutes of the board that the board considered Mr. 
Skilling's approval to be important.
    Ms. DeGette. Thank you. And so you thought he was supposed 
to sign the forms as it went on?
    Mr. Rogers. I did think he was supposed to sign the forms 
as it went on.
    Ms. DeGette. Thank you.
    Mr. Greenwood. The time of the gentlelady has expired. The 
chair would inform the witnesses and the members of the 
committee that we have what appears to be a relatively brief 
series of votes that we must address on the floor, so we will 
recess now for at least 20 minutes and I can't give you a 
precise time because of the uncertainty of the votes, but it 
will be about 20 minutes.
    [Off the record.]
    Mr. Greenwood. The hearing will come to order. The chair 
recognizes the gentleman from Michigan, Mr. Stupak for 10 
minutes for inquiry.
    Mr. Stupak. Thank you, Mr. Chairman. Mr. Dilg, just to ask 
you some questions and you had indicated in your response that 
there was this litigation risk and then you went on and said 
that because of serious decline in the market that there would 
be a litigation risk. Is that some quick summary of what you 
said to Ms. DeGette, that there would a litigation risk because 
of serious decline in the market?
    Mr. Dilg. Right, Enron shares dropped possibly 60 percent 
or so in the last year, at a point in time in August and in 
September when we were writing this report.
    Mr. Stupak. So as long as the market stayed up, Enron would 
never be in trouble, is that correct?
    Mr. Dilg. No sir, I don't believe that was the rationale.
    Mr. Stupak. There wouldn't be any problem unless there was 
lawsuits. The only lawsuits are going to come when people start 
losing money. So all these transactions, partnerships, these 
SPEs, that's okay, as long as the market stays up and Enron can 
cover the cost? Is that sort of the conclusion of the 
logarithm?
    Mr. Dilg. No sir. The Raptor vehicles had had some very 
severe losses hedged against them. I think it was Mr. Causey 
that told us in our interviews that they were designed to deal 
with volatility, not a complete collapse of market.
    Mr. Stupak. Sure, they're supposed to hedge in case there's 
a fall, and they're supposed to hedge, right, or put says Mr. 
Deutsche likes to put it, right?
    Mr. Dilg. That's as I understood the purpose of the 
transactions.
    Mr. Stupak. But puts and hedges are not legal, if you're 
putting up your own company's stock as Enron did, correct?
    Mr. Dilg. I don't believe that's correct.
    Mr. Stupak. What do you believe is correct, if my statement 
was incorrect?
    Mr. Dilg. I believe there was a business purpose. The fact 
that the vehicles were supported by Enron stock, we saw in our 
review nothing that made them illegal because of that.
    Mr. Stupak. So there was no business purpose to these SPEs, 
is that what you're saying? That's what made them improper?
    Mr. Dilg. No, I didn't say they were improper. The business 
purpose, as I understood from Mr. Causey during our review was 
that they were to hedge against volatility in some of the 
stock, some of the investments that Enron had made.
    Mr. Stupak. You know everyone up here at the table at least 
all say I don't have an accounting background. I'm not an 
accountant, you know. I only know the legal/technical merits. 
But none of us on this committee has accounting backgrounds. 
We're not accountants. We can figure out a few things and it 
doesn't take a lot for us to figure out. We've only had 4 or 5 
hearings. You guys have spent more time, in fact, with Enron 
for many, many years. It seems to me, it seems to me that when 
you get the memo from Ms. Watkins, and if you just took a look 
at the letter, not even all the details. If you just read the 
letter. It said Skilling's abrupt departure will raise 
suspicions of accounting improprieties. I'm on 14 if you care 
to follow along, second paragraph. ``Will raise suspicions of 
accounting improprieties and valuation issues. Enron has been 
very aggressive in accounting, most notably in the Raptor 
transactions and the Condor vehicle. We do have valuation 
issues with our international assets and possibly some of our 
EES MTM positions.''
    So her letter is more than just Raptor and Condor. If you 
go down to the fourth paragraph, excuse me, fifth paragraph, 
second line it says ``the value in the swaps won't be there for 
Raptor. So once again, Enron will issue stock to offset these 
losses. Raptor is an LJM entity. It sure looks to laymen on the 
street that we're hiding losses in a related company and will 
compensate that company with Enron stock in the future.''
    So she's really just laying it out there. You don't need to 
be an accountant. You don't need to be a Member of Congress. 
She said a lay person on the street can understand this. The 
problem I'm having and some of my colleagues are as we're 
talking at the votes, all these smart attorneys up here, they 
can't figure it out, but the lay person on the street can 
figure it out. Our concern is what's the relationship here? If 
you take a look at, if we just take a look at the table here, I 
believe what, Mr. Derrick worked for many years for Vinson & 
Elkins on the Enron account and you were at Enron, right?
    Mr. Derrick. Right.
    Mr. Stupak. So you have 25 years there at least.
    Mr. Derrick. It was 20 years, Congressman.
    Mr. Stupak. But Mr. Dilg, you replaced Mr. Derrick and 
Vinson & Elkins. It just seems like such a cozy relationship 
that even when you get a memo that says even the common lay 
person on the street can figure it out, none of you guys can 
figure it out.
    Mr. Dilg. I'm not positive how to respond, Congressman. We 
did understand that the Raptor partnerships were supported 
largely by Enron stock. That was in Enron's disclosures in the 
10(k) and 10(q)s, etcetera.
    What I don't understand from your question is the assumed 
illegality of that.
    Mr. Stupak. Well, okay, I'm not asking for a legal 
conclusion. You said you charged $60,000 to review the Watkins 
memo. Now with that $60,000, I'm sure it's not just for your 
technical, legal merit. I'm sure whatever rate you charge is 
based upon reputation of the firm, common sense, knowledge. In 
fact, you didn't go outside Enron because you guys had all the 
knowledge and therefore it would be easier to do a good review.
    I guess my concern is you bring all this experience and 
expertise, but when we get to a real question, it's either I 
don't have accounting experience or we didn't see the 
technical/legal merit. You come and you're hired and you bring 
other attributes with you as individuals, as attorneys and as 
professional people. It seems like to some of us up here that 
those other attributes were just a blind eye was cast when you 
looked at this memo because it's all within the house. I would 
think when you look at this memo words like ``aggressive 
accounting, creative accounting'' would sort of send a signal 
to someone with all this experience not only within Enron and 
Vinson & Elkins, but even the lay person on the street, those 
are red flags and we should take a more serious in-depth look 
at it which you don't even hire an accountant, where admittedly 
you say you're not an accountant. I would then think, as Ms. 
DeGette was trying to say, you'd at least hire an account when 
you have these red flags out here and you're charging this 
company. There seems to be a circle that you don't want to 
connect here.
    Mr. Dilg. I do think our October 11 and our earlier 
conversations with Mr. Lay and Mr. Derrick pointed out that the 
accounting, even though Arthur Anderson said they stood by it 
and still felt that it was proper, was aggressive and creative. 
We did see that as a red flag and we did put that in our letter 
to make sure that people understood that.
    I think Mr. Lay and I'm not sure all the reasons that went 
into it, but that may well have been one of the reasons they 
terminated the Raptor transactions in the third quarter of 
2001.
    Mr. Stupak. Well, okay. Let me ask Mr. Rogers. You were 
certainly throughout this year the vice president, associate 
general counsel. Have you ever heard the words aggressive or 
creative applied to any Enron accounting before?
    Mr. Rogers. By anyone? I certainly heard of it----
    Mr. Stupak. No, no. I mean before this whole mess started. 
Is creative and aggressive accounting, is that proper 
terminology you use?
    Mr. Rogers. That's not terminology that I would use. I 
hadn't heard that referred to with Enron's accounting 
practices.
    Mr. Stupak. What does aggressive and creating accounting 
mean?
    Mr. Rogers. I don't know what it means.
    Mr. Stupak. How about Mr. Derrick, Mr. Dilg? Mr. Rogers 
doesn't know what it means, but yet you guys used it in your 
report. So what does it mean, aggressive and creative? Mr. 
Derrick?
    Mr. Derrick. Well, it actually was not my report, 
Congressman, but no, I can't----
    Mr. Stupak. It was a report to you from Vinson & Elkins.
    Mr. Derrick. Right, I can't explain what aggressive and 
creative accounting----
    Mr. Stupak. What did you think of it then when they sent 
you this report. You paid $60,000. They send you a report and 
it says ``aggressive and creative.''
    Mr. Derrick. I think the comfort that we took from the 
report was that they had discussed these very things with 
Anderson that we paid millions of dollars----
    Mr. Stupak. Let's back to the words though. What did it 
mean to you? What did it mean to you when you saw on page 7, 
you got this report and you're anxious because there's some 
allegations being made. You read it. You get to page 7, there's 
``aggressive and creative accounting.'' Did you take great 
comfort in that?
    Mr. Derrick. It was, I believe, the following sentence 
where it was no one had any reason to believe that the 
accounting was not technically correct and they had discussed 
these very issues with the firm that our audit committee had 
determined was the appropriate accounting firm for the company.
    Mr. Stupak. So even though you saw the words aggressive and 
creative, you thought, oh, it's no big deal because Anderson 
said it was okay?
    Mr. Derrick. If the next sentence it says ``and by the way, 
Anderson does not believe it's okay'' that would have been 
obviously a great cause of concern.
    Mr. Stupak. Mr. Dilg, you wrote the memo then. What did 
aggressive and creative mean in accounting? What does that 
mean?
    Mr. Dilg. I'm not sure that we put a terminology on it, 
Representative. We were reporting what we'd been told during 
our interviews. I think Mr. Buy used the word aggressive.
    Mr. Stupak. Mr. Buy did?
    Mr. Dilg. I'm not sure. I need to look back through the 
interview memos to see exactly where, but those words, 
obviously, were things that we felt like we needed to convey, 
even though Arthur Anderson said they were still satisfied with 
the accounting and had reviewed Ms. Watkins' letter and the 
allegation she made.
    Mr. Stupak. But you'd agree that those aren't generally 
accepted terminology we used in accounting, right?
    Mr. Dilg. Uh----
    Mr. Stupak. Again, you don't have to be an accountant to 
answer this one.
    Mr. Dilg. I don't believe they're part of generally 
accepted accounting practices, but I understand that Arthur 
Anderson was very convinced that these met generally accepted 
accounting principles.
    Mr. Stupak. All right. If you take a look at the report 
there. Let me get the exact report here, the Powers Report. And 
if you take a look on page 176, again, The Rogers Commission, 
Report or whatever you want to call it, sees this very 
different. If you look on page 176, it talks about the shared 
Watkins letter. I'm quoting now, ``provided a road map to a 
number of the troubling issues presented by Raptors.'' It goes 
on next paragraph, ``We identified the most serious problems in 
the Raptor transactions only after detailed examination of the 
relevant transaction and most importantly discussions with our 
accounting advisors. Both steps at Enron and V & E excepted, 
would not be part of B & E's investigation. With the exception 
of Watkins, B & E spoke only with the very senior people at 
Enron and Anderson. Those people, with few exceptions, had 
substantial professional and personal stakes in the matter 
under review.'' That's the part that's probably troubling most 
of us. This circle, as I spoke of, will you take a look at 
these transactions, who's the approving legal counsel but 
Vinson and Elkins? And you were asked to look at these 
transactions that you had previously approved and yet you never 
even had an accountant when you all say you're not accountants 
even look at it. The closeness, the coziness of the 
relationship is the part that's bothering a lot of us on this 
committee.
    Do you care to add anything to that?
    Mr. Dilg. Only that we were asked to do a preliminary 
review and we did talk to the people that Ms. Watkins laid out 
in her letter to check with. I think she said to see if I'm all 
wet.
    Mr. Stupak. But preliminary review, I mean you did nothing 
further after this.
    Mr. Dilg. I'm sorry?
    Mr. Stupak. You used the word ``preliminary review'' as 
been established early. You really did nothing after this.
    Mr. Dilg. Our preliminary review was to determine whether a 
further review was necessary.
    Mr. Stupak. And you determined there was no further review.
    Mr. Dilg. And we believed at the time we gave the report, 
no further review was necessary.
    Mr. Stupak. Not even by accountants?
    Mr. Dilg. I'm sorry?
    Mr. Stupak. Not even by an accounting firm outside of 
Arthur Anderson?
    Mr. Dilg. Arthur Anderson, again, was one of the Big Five 
accounting firms that had been chosen by the Audit Committee at 
Enron.
    Mr. Stupak. Right. All in-house, right? All in-house. 
Arthur Anderson, in-house. They had attorneys in-house. They 
had accountants in-house, right? And you never talked to any of 
those people.
    Mr. Dilg. We talked to the leading engagement partner for 
Arthur Anderson.
    Mr. Stupak. Head guy at Anderson. Those people had 
substantial professional and personal stakes in the matter 
under review as it says in the Powers Report, right? Those were 
the people that were talked to.
    Mr. Dilg. I don't know how they characterized the personal 
stakes they had in it. They had the credibility of their 
veracity on the line.
    Mr. Stupak. They had a dog in the fight, let's put it like 
that.
    Mr. Dilg. We had no reason to believe that we couldn't 
believe them.
    Mr. Greenwood. The time of the gentleman has expired. The 
chair recognizes the gentleman from North Carolina, Mr. Burr 
for 10 minutes to inquire.
    Mr. Burr. Thank you, Mr. Chairman. Mr. Sefton, let me ask 
you, I would take for granted everybody at the table has kept 
up with the hearings that have happened in the house and with 
the publicity that exists around Mr. Skilling's testimony, I 
think most of you probably know that he lacked the ability to 
remember a lot of things and in some cases suggested that he 
had no relation to the involvement of the partnership.
    Let me ask you, Mr. Sefton, do you believe that Mr. 
Skilling was accurate in his testimony in front of Congress?
    Mr. Sefton. During my time in Enron Global Finance, I don't 
believe I had any conversations with Mr. Skilling at all. So I 
have no basis on which to judge.
    Mr. Burr. But you did leave some handwritten notes about 
your understanding of the makeup of the partnerships and the 
need for Mr. Skilling's signature to accompany the approval, 
didn't you?
    Mr. Sefton. I'm not sure that my notes talk about his----
    Mr. Burr. Who replaced you?
    Mr. Sefton. Jordan Mintz.
    Mr. Burr. And didn't Mr. Mintz testify to us that it was, 
in fact, the notes that you left when you served in his role 
that sort of guided him as to what everybody's involvement was 
and who had to sign off?
    Mr. Sefton. I didn't hear Mr. Mintz testify to that.
    Mr. Burr. Was that the intention of any of the notes that 
you wrote, if they referred to the need for Mr. Skilling's 
signature, is that something that you understood was needed?
    Mr. Sefton. As I explained earlier, I did not understand 
that it was required by the Board when they waived the conflict 
of interest.
    Mr. Burr. Mr. Derrick, do you believe that from what you 
know, Mr. Skilling was completely candid with his testimony in 
front of Congress?
    Mr. Derrick. Well, Congressman, as you can appreciate, I 
have no way of knowing, in fact, what Mr. Skilling did or did 
not know. If your question relates to whether it was my view 
that his signature was required on the documents, certainly 
based on my conversations with Mr. Mintz, that would have been 
my understanding.
    Mr. Burr. Did Mr. Mintz dream this up? Was it printed 
somewhere or did he get it from the notes that Mr. Sefton left?
    Mr. Derrick. I don't know where Mr. Mintz received his 
information. I do recall though that at one of the Audit 
Committee meetings that it was presented as a control mechanism 
by Mr. Causey, as I recall, and Mr. Mintz was there. But as to 
the basis for where that came from, I don't have personal 
knowledge of that.
    Mr. Burr. There was one thing that I know was printed at 
Enron and that was the Code of Conduct, correct?
    Mr. Derrick. Correct, yes sir.
    Mr. Burr. The Code of Conduct was waived by the board in at 
least two instances for Andy Fastow, am I correct?
    Mr. Derrick. You are correct.
    Mr. Burr. Were you ever consulted as counsel on whether 
that was a smart thing for Enron to do?
    Mr. Derrick. Congressman, I don't ever recall being 
consulted.
    Mr. Burr. Did you ever supply a recommendation on whether 
as counsel the board should waive the Code of Conduct?
    Mr. Derrick. I don't recall being consulted on that.
    Mr. Burr. Mr. Dilg, was your law firm consulted on the 
board's decision whether they should waive the Code of Conduct?
    Mr. Dilg. We did not advise the board.
    Mr. Burr. It's a very reputable law firm nationally. Is it 
common for companies to have a Code of Conduct that is waived 
the way that Enron has waived this Code of Conduct or waive a 
Code of Conduct at all?
    Mr. Dilg. I could speak to what's common, Representative, 
by companies that have Codes of Conduct have them there for a 
purpose which is to make sure they know where there is a 
conflict of interest and they feel that they've dealt with it 
appropriately.
    Mr. Burr. That's my understanding from CO's as well and 
they have also expressed to me in my conversations that they 
can't imagine that it would take an unbelievable circumstance 
within their company for a Code of Conduct to be waived.
    Let me go back to you, Mr. Sefton. I think the LJM2 
approval sheet was your creation and I just want to ask you 
because as I go down the sheet from that sheet it says the 
persons negotiating for Enron, Ben Glisson. Excuse me, this is 
for Raptor. Persons negotiating for LJM, Michael Kopper. Both 
who work for Fastow, correct?
    Mr. Sefton. Yes.
    Mr. Burr. In the 2000 Proxy, as it relates to it, it says 
these transactions occurred in the ordinary course of Enron's 
business and were negotiated on an arm's length basis with 
senior officers of Enron other than Mr. Fastow.
    Is the term ``at arm's length'' in this proxy statement an 
accurate depiction of the negotiations that took place between 
Mr. Glisson and Mr. Kopper, in your opinion?
    Mr. Sefton. I believe the reference to senior officer is to 
Mr. Causey and Mr. Buy.
    Mr. Burr. I'm reading off the sheet. Listen, persons 
negotiating for LJM, Michael Kopper. As counsel, how did you 
monitor the negotiations or did you?
    Mr. Sefton. I don't believe I monitored the negotiations.
    Mr. Burr. Mr. Sefton, on June 28, 2000 you signed this 
approval sheet. So I would take for granted it was your 
understanding that at that time what was on this sheet was 
accurate, that the negotiations took place between Glisan. He 
also signed the sheet. In addition, Mr. Rogers, is your name 
Rex?
    Mr. Rogers. Yes sir.
    Mr. Burr. You signed this sheet too.
    Mr. Rogers. Yes sir, my signing those deal approval sheets 
were for the limited purpose of Section 4(a) which was----
    Mr. Burr. Just share with us, if you will, since there's 
some confusion. Who negotiated for Enron and who negotiated for 
the partnership?
    Mr. Rogers. On this particular transaction or any 
transaction?
    Mr. Burr. This one.
    Mr. Rogers. I don't know the answer to that.
    Mr. Burr. Mr. Derrick, on October 17, Enron was informed by 
the SEC of an inquiry, correct?
    Mr. Derrick. That is correct.
    Mr. Burr. And what date was the first memo that went 
company-wide to Enron relative to a change in the document 
protection of rules at Enron?
    Mr. Derrick. If memory serves me correctly, Congressman, I 
believe it was on October 25 with respect to the litigation 
that had been filed.
    Mr. Burr. Share with me with all the concerns that didn't 
start with October 17, what transpired in an 8-day period at 
Enron and specifically in the legal counsel's office that would 
delay for 8 days a memorandum to protect all documents given 
that you knew that there was an SEC inquiry?
    Mr. Derrick. As you know, Congressman, we sent out a number 
of e-mails with respect to document presentation, preservation. 
I think with respect to the limited time that you're referring 
to, following the communication from the Securities and 
Exchange Commission, Mr. Rogers became involved in that as our 
representative, having been a former member of the SEC's 
organization.
    If your point is were we concerned about any document 
destruction at that time----
    Mr. Burr. Was this the first SEC inquiry that had been 
presented to Enron?
    Mr. Derrick. I'll have to refer to Mr. Rogers. I don't 
personally recall another SEC inquiry.
    Mr. Burr. Mr. Rogers, is an SEC inquiry, given that you've 
got some SEC experience, is that a serious thing?
    Mr. Rogers. Very serious.
    Mr. Burr. Would you as with your knowledge of SEC and law 
background, is that something that would immediately send off a 
signal we need to protect everything that's here?
    Mr. Rogers. Yes sir.
    Mr. Burr. And what would take 8 days in your opinion to 
determine it's time to send out a company-wide memo to say 
don't throw anything away, this is serious.
    Mr. Rogers. I don't know the answer to that. I think in 
those first several days after the notice or the inquiry from 
the SEC, there was a lot of activity at Enron through responses 
to media requests.
    Mr. Burr. But you served in a legal capacity, correct?
    Mr. Rogers. That's correct.
    Mr. Burr. And in a legal capacity with an SEC background, 
you couldn't have been distracted by media requests, given the 
seriousness that you knew this inquiry weighted?
    Mr. Rogers. No sir, our immediate reaction was to respond 
to the SEC request for documentation, for information. That was 
the immediate response.
    Mr. Burr. Is part of an SEC inquiry and the request that 
goes along with it the protection of documents?
    Mr. Rogers. I don't recall that being part of the request, 
but certainly anyone at the company, certainly anyone in the 
legal staff is going to----
    Mr. Burr. Knows that document destruction after that 
inquiry is noticed to be a serious, serious thing, right?
    Mr. Rogers. Yes sir.
    Mr. Burr. And let me ask you, were you aware of any 
document destruction that took place at Enron?
    Mr. Rogers. I am not aware of any document destruction at 
Enron Corp.
    Mr. Burr. Mr. Derrick, are you aware of any document 
destruction that took place at Enron?
    Mr. Derrick. I'm not aware of any relevant document--if you 
mean literally any document destruction, there are various 
things, trade secret issues that, of course, would legitimately 
be being disposed of, but in terms of any relevant document 
destruction, Congressman, I am not, and as you recall, later 
when there was a report which was widely publicized with 
respect to potential concerns about that, the response of Enron 
was to request the FBI to come in. We opened our doors and 
cooperated fully with them.
    Mr. Burr. Clearly, you did, and I think there was a lag and 
I'm truly concerned on the 8 days. And my time has run out, but 
I would like to ask Mr. Dilg, short answer if you will, for the 
chairman's indulgence.
    Were there legal opinions and/or work provided by Vinson & 
Elkins that were ignored by Enron?
    Mr. Dilg. Again, as I stated earlier----
    Mr. Burr. You have advised them on numerous legal opinions. 
You've stated that.
    Mr. Dilg. We've advised on numerous legal matters. As I 
mentioned earlier, there's never a situation that I'm aware of 
where we advised the company that something would be illegal 
that they ignored that advice. We give advice on a daily basis 
to our clients as far as things that we think may be a better 
way to do something or often offer even business advice that 
companies may decide not to follow. That is sort of a normal 
occurrence, but when it comes to whether something is illegal, 
I'm not aware of Enron ever not following our advice in that 
connection.
    Mr. Burr. I once again would like to thank all of you for 
your testimony today. I hope in the end, we're able to go back 
and read the transcripts and understand a little bit better 
what happened, but I've got to share with you that is 
frustrating from this end to actually hold documents that were 
at Enron that named partners, that named negotiators, that 
named participants. Nobody can remember whether they were 
involved or not, that from the top of Enron to the legal 
counsel at Enron that it seems like the only person that knew 
what was going on was Sherron Watkins. And I question whether 
she was taken seriously by anybody, including the review. It's 
quite honest that Enron probably got what they paid for, 
$60,000 you said, was--I thought that was a drop in the bucket 
for the degree of the accusations that were made. But I think 
that gives me some idea of exactly the extent of what you were 
asked to review. I thank you.
    Mr. Greenwood. The gentleman's time has expired. The 
committee is joined by two members who are members of the full 
committee, but not the Subcommittee and I'm going to recognize 
them in one moment for inquiry. Before I do, I'm going to 
exercise the prerogative of the chair to follow up on something 
here.
    I'm looking at an LJM2 approval sheet. It's Tab 20 in your 
notebooks. You may all want to refer to this. And it's about 
halfway through the set of documents in your notebooks in Tab 
20. And this describes a deal between Talon, which is a Special 
Purpose Entity organized for the purpose of entering into 
certain derivative transactions. LJM2 says--it says that LJM2 
through its 100 percent voting control, Talon has unilateral 
ability to make investment decisions for Talon. Now--it's the 
Raptor deal.
    It indicates in the person negotiating for Enron in this 
case is Ben Glisan. The person negotiating for LJM is Michael 
Kopper. Obviously, both of these gentleman work for Mr. Fastow 
and each working for him under one of his different hats that 
he wore.
    A number of you folks signed the approval deal. These 
transactions were negotiated by Enron employees who were 
working for both Enron and LJM2 at the same time. Enron's Year 
2000 proxy statement reads, ``These transactions occurred in 
the ordinary course of Enron's business and were negotiated on 
an arm's length basis, that senior officers of Enron other than 
Mr. Fastow'' and that was signed by, among others, Mr. Rogers 
and Mr. Sefton.
    My question is Mr. Sefton and Mr. Rogers, beginning with 
you, how did you ascertain that, in fact, these were arm's 
length--these negotiations were at an arm's length basis?
    Mr. Rogers. I'll respond first. Again, my signing off on 
all of these deal approval sheets was for the limited purpose 
of Section 4(a). Will this transaction require disclosure as a 
certain transaction in Enron's proxy statement? And the answer 
is yes. If any of the transactions has a value of $60,000 or 
more it will be disclosed in the proxy statement.
    Mr. Greenwood. Were you aware that these two gentlemen were 
negotiating against one another?
    You signed a document that said that you knew that they 
were, but that you knew that it was arm's length.
    Mr. Rogers. Again, I was signing for the limited purpose of 
Section 4(a).
    Mr. Greenwood. Did you know that they were negotiating 
against one another? That's--let's take it one question at a 
time. Did you know that these two gentlemen were negotiating 
against one another?
    Mr. Rogers. I don't recall.
    Mr. Greenwood. But you signed a form that said that you did 
and that, in fact, not only did you know that they did, but you 
knew that it was arm's length.
    Mr. Rogers. Well, signed for the purposes of Section 4(a).
    Mr. Greenwood. Mr. Sefton, how about you? Did you know that 
these individuals were negotiating against one another?
    Mr. Sefton. Yes.
    Mr. Greenwood. And did you sign a form saying that you knew 
that they were negotiating at this negotiation was at arm's 
length?
    Mr. Sefton. I signed the form.
    Mr. Greenwood. Did you in signing that form, in fact, 
certify that they were negotiating at arm's length?
    Mr. Sefton. No, I did not.
    Mr. Greenwood. What is the significance of your signature 
on the form? What were you certifying? What were you proving?
    Mr. Sefton. I think the important thing to remember is that 
this transaction is being approved by Mr. Buy and Mr. Causey, 
and that is the procedure that the board had put in place to 
ensure that the transactions were being done at an arm's length 
basis.
    Mr. Greenwood. And how did you know that it was approved by 
Causey?
    Mr. Sefton. Because they are signing the form as well.
    Mr. Greenwood. So in other words, your role when you get 
this form is to look on it and see if Mr. Causey's signature is 
on it and then certify that his signature is on it and put your 
signature on it to certify that his signature is on it. Is that 
right?
    Mr. Sefton. What? The board required----
    Mr. Greenwood. Is that--just answer that question. When you 
signed these approval forms, what you were doing was saying, 
yup, I see Causey's signature on here. It's right above mine. 
I'll sign mine name to certify that I see Mr. Causey's 
signature. Is that what you did?
    Mr. Sefton. No.
    Mr. Greenwood. What did you do?
    Mr. Sefton. I would also review the form and make sure it 
had been completed, all the blanks filled in. That it was 
properly filled out. Since I had been involved in creating the 
form, I was----
    Mr. Greenwood. Whose job was it to--who certifies that, in 
fact, these transactions occurred in the ordinary course of 
Enron's business and were negotiated on an arm's length basis 
with senior officers of Enron's, other than Mr. Fastow? Whose 
job was that?
    Mr. Derrick, can you tell us whose job it was to certify 
this was arm's length? This goes right to the core of the 
conflict of interest?
    Mr. Derrick. Well, I believe that it was Mr. Causey and Mr. 
Buy who were charged with the responsibility on the business 
side of that, in determining that. If there had been matters 
that were unlawful, I think that the lawyers would have been 
signing this. And let me say I did not create this form, but 
that would be my understanding, Mr. Chairman, is that the 
lawyers were there to ensure----
    Mr. Greenwood. You were aware that they were negotiating 
against one another?
    Mr. Derrick. No, this is not a form that came to me, Mr. 
Chairman.
    Mr. Greenwood. Would you have considered it improper if you 
knew that they were negotiating against one another?
    Mr. Derrick. At the time of this, again, I'm not sure what 
the date here was, but I don't think that we became aware that 
Mr. Glisan had any interest that was not tantamount to Enron's 
interest until after the investigation began.
    Mr. Greenwood. The private placement memorandums list the 
principals. It says the day to day activities of the 
partnership will be managed by Mssrs. Fastow, Kopper and 
Glisan. So Mr. Sefton saw this form. Mr. Astin saw this form. 
Mr. Rogers saw this form. You all reviewed it and that didn't 
tell you that there was something less than an arm's length 
negotiation going on here?
    Mr. Rogers. I'm sorry, what form are you referring to?
    Mr. Greenwood. It's the LJM2 co-investment LP. It's the 
private placement memorandum.
    Mr. Rogers. That's not an Enron document.
    Mr. Greenwood. That's 21.
    Mr. Rogers. Okay. It's a private placement memorandum.
    Mr. Greenwood. Right.
    Mr. Rogers. Of LJM. I reviewed a draft of it. I didn't see 
the final version of it.
    Mr. Greenwood. Do you think the draft of it indicated that 
the partners were--that the day to day activities of the 
partnership will be managed by Fastow, Kopper and Glisan?
    Mr. Rogers. It was my understanding that Glisan was not in 
the final draft. I didn't see the final, but it was my 
understanding that wasn't going to be Glisan's role.
    Mr. Greenwood. You can remember that?
    Mr. Rogers. I do remember that.
    Mr. Greenwood. You remember that--why do you think that 
sticks out in your mind? Why would you have recalled that?
    Mr. Rogers. I recall that because----
    Mr. Greenwood. Had it been otherwise, you would have been 
concerned?
    Mr. Rogers. I recall it because we had a senior corporate 
securities lawyer at Vinson & Elkins review the memorandum. 
Again, it's not a memorandum.
    Mr. Greenwood. Who was that?
    Mr. Rogers. It was Bob Baird. It wasn't a memorandum. It's 
not an Enron Corp. memorandum. It was prepared by LJM and their 
counsel. And the draft that I saw had, among other things, Ben 
Glisan, my understanding, I didn't see the final draft, but it 
wasn't my understanding that Ben Glisan was going to be acting 
on behalf of LJM.
    Mr. Greenwood. Would you have thought it proper for these 
guys to be negotiating against one another, one on behalf of 
the partnership and one on behalf of the company? Could that 
ever have been proper?
    Mr. Rogers. My understanding at the time is that Mr. Glisan 
was the treasurer of Enron Corp. and that he would have been 
acting on behalf of Enron Corp.
    I didn't have any information at the time that indicated 
otherwise.
    Mr. Greenwood. The chair recognizes the gentleman from 
Massachusetts, Mr. Markey for 10 minutes.
    Mr. Markey. Thank you, Mr. Chairman, very much. Mr. 
Derrick, I want to recap where we are right now in this 
hearing. You've testified that when Sherron Watkins' allegation 
came to your attention Enron and Vinson & Elkins designed (1) 
to ignore her warnings, that Vinson & Elkins and Arthur 
Anderson had conflicts and shouldn't be used to investigate the 
allegations; (2) you also decided to limit the nature and scope 
of Vinson & Elkins inquiry so that it didn't examine the 
underlying accounting, didn't employ full discovery and 
investigative techniques; (3) you also decided notwithstanding 
this blistering, scalding indictment of a memo which Ms. 
Watkins delivered to Mr. Lay and to you, subsequently, you also 
decided, No. 3, not to interview any former employees, like 
Jeff Skilling or Cliff Baxter who might have been able to shed 
some light on the transaction; (4) not to follow-up on leads 
Sherron Watkins provided with respect to other employees who 
could substantiate her allegations, notwithstanding the fact 
that she has almost been completely vindicated in retrospect; 
and (5) to largely limit your inquiry to interviewing 
individuals like Andy Fastow and Doug Duncan who were 
responsible for putting together these transactions or 
reviewing and approving them and who would therefore be likely 
to defend these transactions as appropriate and lawful.
    So Mr. Derrick, what I'd like to do is just go back to the 
beginning of the process which you put in place. According to 
your testimony to the Powers Committee, you first learned of 
the Sherron Watkins letter when Ken Lay gave it to you. What 
did Mr. Lay say to you when he gave you this letter?
    Mr. Derrick. I don't recall the specific conversation, and 
I don't recall whether, as I think I made it clear there, 
whether he walked it over, whether he sent it over, but 
immediately upon receiving it I distributed the copies of that 
memorandum to what I thought at the time were the appropriate 
people, which included Sharon Butcher, who keeps care of our 
tracking log, to Mr. Fastow, Mr.----
    Mr. Markey. So you are saying you cannot remember if Mr. 
Lay handed this to you personally? You cannot remember that.
    Mr. Derrick. Congressman, all I can testify to is what I 
personally recall.
    Mr. Markey. This is a bombshell. He handed you dynamite 
that could blow up the Corporation or he did not. You don't 
remember if he did.
    Mr. Derrick. I don't recall whether it was carried over or 
whether he brought it over. No, I'm sorry, I just don't.
    Mr. Markey. That is hard to believe. Now, let me ask you 
this: Did you and Mr. Lay discuss whether the issues raised in 
the letter might arise at an all-employee meeting scheduled to 
be held in a few days?
    Mr. Derrick. There was an all-employee meeting, and the 
question was----
    Mr. Markey. You discussed that subject with Mr. Lay.
    Mr. Derrick. I think we did, yes. I can't say that it was 
the time that I received the letter.
    Mr. Markey. You told the Power Committee that in fact you 
did discuss subject with----
    Mr. Derrick. Yes, but the question, Congressman, is whether 
it was at the time I received the letter. I don't recall 
whether it was at the time I received the letter.
    Mr. Markey. Subsequent to the receipt of the letter, within 
the next several days, did you discuss it with him?
    Mr. Derrick. Yes.
    Mr. Markey. You did. Now, you and Mr. Lay discussed the 
need to have an investigation done into these allegations. Who 
proposed selection of Vinson & Elkins, you or Mr. Lay?
    Mr. Derrick. I believe--well, it was a mutual discussion, 
but I think it would have been me who proposed Vinson & Elkins.
    Mr. Markey. Okay. Did you discuss with Mr. Lay the 
potential conflict of interest which Vinson & Elkins had with 
Enron?
    Mr. Derrick. Yes, we did. We discussed the possible 
downside because they had been involved in it. On the other 
hand, there was, as I've said before, the great strength that 
they had the background, and following up on that--but the 
question ultimately would be for the law firm to determine 
whether in fact there was a conflict of interest.
    Mr. Markey. Did Mr. Lay suggest that Vison & Elkins' 
investigation be limited in scope and that it not examine the 
accounting and that it not be a full-scale inquiry with 
discovery and interviews with both current and former 
employees? Did he ever suggest that to you?
    Mr. Derrick. We discussed it. I don't recall that Mr. Lay 
proposed that. The question was how do we, as quickly as 
practical, get an investigation that will enable us to have 
recommendations as to whether to launch a full-scale 
investigation.
    Mr. Markey. So did Mr. Lay say to you that it would 
preferable if we did not have to go outside of Vinson & Elkins 
or Arthur Andersen?
    Mr. Derrick. To the best of my knowledge, he never 
expressed that.
    Mr. Markey. He did not.
    Mr. Derrick. He did not.
    Mr. Markey. Okay. Did you and Mr. Lay discuss potential 
adverse publicity that would result if Ms. Watkins' allegations 
became public?
    Mr. Derrick. To the best of my recollection, there was 
never a discussion with respect to that.
    Mr. Markey. Did you and Mr. Lay discuss the potential 
litigation that could result if these allegations became 
public?
    Mr. Derrick. To the best of my knowledge, we never had a 
discussion. Our sole purpose was to address these as quickly 
as----
    Mr. Markey. You are saying absolutely not. Mr. Lay never 
raised the public relations aspect of this, the consequences to 
the corporation if this ever became public. He never said that 
to you during any of these meeting?
    Mr. Derrick. I believe that you are referring to the 
initial meetings we had.
    Mr. Markey. I am referring now to all of the meetings up to 
the point at which ultimately we have a release of this report 
by Vinson & Elkins. Did he ever mention at any time his great 
concerns about--remember now, you are a former partner of 
Vinson & Elkins now dealing with the managing partner of Vinson 
& Elkins, so we are very concerned about this conflict that 
exists, at least in your mind, to preexisting loyalty to a firm 
that basically gave you the opportunity to work at Enron. So 
what about any conversation--did Mr. Lay at any time ever have 
any conversations with you about the publicity consequences if 
this report was devastating?
    Mr. Derrick. Congressman, the only recollection I have 
would be at the time that Vinson & Elkins presented their 
presentation to us, pointing out the possibility of adverse 
publicity and litigation, but I don't recall Mr. Lay ever 
raising that as an issue.
    Mr. Markey. Did you ever discuss with Mr. Lay whether Ms. 
Watkins could or should be dismissed?
    Mr. Derrick. No, I do not recall ever having a conversation 
with Mr. Lay. He mentioned that she had requested that she be 
reassigned from Mr. Fastow, but there was never any indication 
in any conversation I had with Mr. Lay with respect to any 
firing of Ms. Watkins.
    Mr. Markey. Okay. Now, Mr. Dilg, did Mr. Derrick at any 
time say to you that he would prefer that you resolve this 
question in a way in which you did not have to recommend 
another firm do the investigation?
    Mr. Dilg. No, sir.
    Mr. Markey. He never did.
    Mr. Dilg. No, sir.
    Mr. Markey. Did you ever recommend to him that you would 
prefer that it stay in-house and that another firm not be 
called in to do an independent investigation?
    Mr. Dilg. No, sir. Our final recommendation in the October 
15 letter was that there was no further investigation.
    Mr. Markey. When Mr. Lay--did you ever talk to Mr. Lay 
about this case, Mr. Dilg?
    Mr. Dilg. We had one meeting with Mr. Derrick and Mr. Lay I 
believe--I think the date was September 21, but I am not 
positive.
    Mr. Markey. And at that meeting, did Mr. Lay say to you 
that he would prefer if you did the investigation, that is 
Vinson & Elkins, and not some outside firm?
    Mr. Dilg. No, sir. We were reporting on the investigation 
we had done thus far.
    Mr. Markey. And at that point, you had not reached any 
conclusions that would indicate that the accounting practices 
or other practices would cause problems for the firm?
    Mr. Dilg. We reported on what we had heard from Arthur 
Andersen with respect to the accounting.
    Mr. Markey. And you were satisfied that there were no 
problems?
    Mr. Dilg. I am not an accountant, so we alerted him to the 
references to creative and aggressive, et cetera, that we had 
heard during our interviews, but we did tell him that Arthur 
Andersen was fully comfortable with their accounting treatment.
    Mr. Markey. You know, I have a real problem with all of 
this. Obviously, the Powers Committee conducted a real 
investigation. Enron and Vinson & Elkins did not in fact 
conduct a real investigation. When the ordinary investor or 
employee at Enron thinks that an investigation is being done, 
they think that people, that is the investigators, are acting 
like Columbo, asking all the questions that no one else would 
think of in order to make sure that the truth was obtained. In 
fact, what you did was act more like Inspector Clueso, 
stumbling over obvious evidence, not interviewing obvious 
suspects or witnesses, and in fact coming to conclusions that 
delayed the point at which a real reckoning was in fact 
possible.
    And I think if you had not conducted this phony 
investigation, that it might have been possible that we would 
not have seen the collapse of Enron, that we would have had 
enough time to take the types of actions, not we, but rather 
the corporation and others, in order to save that corporation, 
the employees' jobs, the investors' savings. And so I have 
absolutely no question in my mind that there was a decision 
made here. I wish I knew definitively who made the decision 
that this was going to be too dangerous. We don't know that at 
this point.
    I disagree with Ms. Watkins. She rules out Mr. Lay. I don't 
think that this committee should rule him out. I don't think 
yet we know what took place in those conversations initially 
after he received this memo from her. It is such a blistering, 
scalding indictment of the practices at the firm that 
ultimately have been almost completely vindicated, that much 
more is going to have to be found by this committee. I thank 
you once again, Mr. Chairman.
    Chairman Tauzin. I thank my friend from Massachusetts, and 
I am pleased now to recognize a round of questions my friend 
from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I appreciate the 
opportunity to wave in on the subcommittee, and I have an 
opening statement that we have submitted. And I guess before I 
go into questions, the frustrations that someone--particularly 
someone from Houston for 30 years had the utmost respect for 
Arthur Andersen and Vinson & Elkins and the last 16 for Enron, 
even if we are on a different sides of a political issues 
oftentimes, and to see what has happened. And that is the 
frustration that we see, and you see if from other members who 
maybe aren't directly related to what has happened in Houston.
    Mr. Rogers, first, who did Mr. Glisan report to at Enron?
    Mr. Rogers. He reported to Mr. Fastow.
    Mr. Green. Okay. So he wasn't independent of Mr. Fastow?
    Mr. Rogers. I am sorry?
    Mr. Green. So he was not independent of Mr. Fastow if he 
reported to Mr. Fastow.
    Mr. Rogers. When you say independent, I mean he reported to 
Mr. Fastow, that was his superior officer, that is correct.
    Mr. Green. Okay. Mr. Sefton, according to your notes, and 
they are under Tab 18, and it is actually 24309, on September 
29, 1999, shortly after you arrived in Houston to begin working 
for Mr. Fastow, you had a meeting with Mr. Fastow, is that 
correct?
    Mr. Sefton. These notes would indicate that I did, yes.
    Mr. Green. Okay. And he explained the LJM deals to you, 
didn't he?
    Mr. Sefton. I don't recall that meeting. My best 
recollection of what happened at that meeting is in these 
notes.
    Mr. Green. Okay. And your notes reflect LJM1, and without 
having to read all the notes from September 29, they reflect 
LJM just some of the highlights, without having to go into them 
because I only 10 minutes, but your notes reflect discussion on 
LJM, is that correct, these notes that we have in Tab 18?
    Mr. Sefton. Yes. These notes were taken, I believe, during 
a discussion. I don't know what each individual means, whether 
it reflects a statement made by Mr. Fastow or whether it is 
sort of an observation on my own part.
    Mr. Green. Well, assuming they were your notes and they 
were observations of your meeting, one of the purposes of LJM1 
that your notes directly mention was to hedge Enron's 
investment in RythmsNet stock, which was very volatile. Enron's 
investment had gone from $10 million to $150 million in less 
than 6 months after RythmsNet went public; is that correct?
    Mr. Sefton. I don't know that.
    Mr. Green. Okay.
    Mr. Sefton. I wasn't involved in the LJM1 transaction, that 
took place before I arrived.
    Mr. Green. Okay. Well, but your notes that we are going 
from talk about your discussion with him, and maybe I need to 
read the notes to you, because they are there. ``Two things led 
to LJM1: forward contents to purchase Enron stock, prices below 
market. Buying shares back would have increased equity, but we 
would have had to borrow money which would cause problems. Had 
the Rhythm stock position, huge volatility. We want to hedge 
the Rhythm stock position but couldn't do it in market.'' Those 
are your notes.
    Mr. Sefton. Yes.
    Mr. Green. Okay. I would appreciate it if you would at 
least familiarize yourself with your notes. Then when I ask you 
the question, instead of me having to take up my 10 minutes in 
reading your notes to you.
    Mr. Sefton. I am sorry. That wasn't----
    Mr. Green. Enron could not sell its Rhythm stock for 
another 6 months; is that correct?
    Mr. Sefton. Is that in my notes?
    Mr. Green. No, it is not, but I am asking you from other 
knowledge other than these notes. Your notes reflect the 
volatility of the Rhythms stock position and the huge 
volatility. Do you know that Enron couldn't sell their 
investment in it for 6 months?
    Mr. Sefton. I am sorry, but I did not work on that 
transaction. I am not familiar with what happened there.
    Mr. Green. Okay. That is what Vince Kaminski told the 
Powers Committee, though, that Vince Kaminski was the head or 
Enron's research group at the time, told the Power Committee 
that could not buy such a hedge in the market because it 
prohibitively expensive, obviously very volatile from your 
notes. In fact, yesterday the analyst from 
PricewaterhouseCoopers who valued that stock for Enron told our 
staff that the volatility was off the charts. So, again, 
reflects your notes from 1999.
    According to your notes, Mr. Fastow told you that Enron 
couldn't hedge Rhythms in the market. Was it also your 
understanding that no outside third party would have taken the 
hedge at the price LJM did?
    Mr. Sefton. All that I recall from this meeting are these 
notes.
    Mr. Green. Okay. Your notes, again, seem to refer to the 
Rhythms stock position had huge volatility, and your notes 
reflect, ``We wanted to hedge the Rhythms stock position but 
couldn't do it in the market.'' So that agrees with what Mr. 
Kaminski shared with us yesterday, and also the analyst from 
PricewaterhouseCoopers.
    It is very interesting in the 1999 annual report, footnote 
16, that states that, ``Management believes that the terms of 
the transactions related with the representative terms that 
would be negotiated with an unrelated third party.'' Did you 
see any evidence from your notes or from your memory other than 
your notes that that was an independent third party?
    Mr. Sefton. I am sorry, you are referring to what document?
    Mr. Green. Okay. The annual report for Enron was 1999.
    Mr. Sefton. The annual report?
    Mr. Green. Footnote 16. Just trust me I am----
    Mr. Sefton. Okay.
    Mr. Green. [continuing] saying that footnote 16 states 
that, ``Management believes that the terms of the transactions 
with related parties are representative of terms which would be 
negotiated with unrelated third parties.'' That is in that 
report. Do you have any evidence of that from your notes or 
your memory that that was really unrelated third parties in 
LJM1?
    Mr. Sefton. Well, I am not sure if I am answering your 
question, but I wasn't involved in the preparation of that 
annual report footnote. I am not familiar with----
    Mr. Green. I know, but I am asking you do you have any 
information that would show that that footnote was correct from 
your notes here and any information at all, other than your 
recollection from these notes?
    Mr. Sefton. No, I don't think there is anything in my notes 
that would speak to that.
    Mr. Green. Okay. The proxy says that same thing, the proxy 
statement. It states that, ``Management believes that the terms 
of the transactions were reasonable and no less favorable than 
the terms of similar arrangements with unrelated third 
parties.'' Mr. Sefton, Mr. Derrick and Mr. Astin, tell me what 
basis you had on signing off on the statement, and what was the 
due diligence that these representations called for?
    Mr. Derrick. Congressman, speaking for myself, I didn't 
have a personal involvement in that. We had in place what we 
considered to be a large team of qualified people who would 
have been looking at that and preparing the proxy statements. 
And it would have been on the basis of what they did that would 
have been the basis for that statement.
    Mr. Green. Who was in charge of making sure this proxy 
statement was correct then within the Enron legal team?
    Mr. Derrick. Well, internally, Mr. Rogers was leading our 
securities effort.
    Mr. Green. Okay. Mr. Rogers, the statement that, 
``Management believes that the terms of the transactions were 
reasonable and no less favorable than the terms of similar 
arrangements with unrelated third parties,'' did you sign off 
on that statement to be in the proxy?
    Mr. Rogers. I was part of the team that was charged to 
gather the information. I did not do the personal due diligence 
on that.
    Mr. Green. What was the due diligence from the team, if not 
yourself?
    Mr. Rogers. The due diligence were lawyers and accountants 
within Enron were assigned to gather the information. I didn't 
draft the proxy disclosure.
    Mr. Green. But you signed off on it.
    Mr. Rogers. Well, when you say signed off on it, I reviewed 
it, and based on the information that was presented to us, we 
agreed with it.
    Mr. Green. What information was presented to you from the 
lawyers and accountants to show that this was no less favorable 
than unrelated third parties?
    Mr. Rogers. The internal legal team that worked on the 
underlying transactions. My team did not work--was not assigned 
to work on any of the LJM or any of the structured finance 
transactions. So we had no personal knowledge of them. The 
parties that were assigned to draft the proxy disclosure were 
the parties that worked on the transactions and the lawyers and 
accountants that worked on the transactions that would have 
done the due diligence.
    Mr. Green. Can you give us some names of who that would be, 
the lawyers that worked for your team--or that worked for that?
    Mr. Rogers. I don't know the specific lawyers and 
accountants. It would have been lawyers in the Enron Global 
Finance Unit and the accounting team that reports to Rick 
Causey who also signs off on all of the LJM transactions, along 
with the chief risk officer who was reviewing these 
transactions in terms of fairness to Enron.
    Mr. Green. So someone told you in those teams that this 
statement was correct, and you signed off on it.
    Mr. Rogers. Based on that compilation of due diligence, 
correct.
    Mr. Green. Mr. Rogers--and Mr. Chairman, I know--let me 
just ask, on the statements on the LJM approval sheet where you 
signed--in previous questions, you answered that you only 
signed off relating to 4(a).
    Mr. Rogers. That is correct.
    Mr. Green. Is that 4(a) on the compliance sheet of this or 
is that some other----
    Mr. Rogers. No, it is 4(a) on this sheet. It is 4(a), does 
it require proxy disclosure, and the answer is yes, because 
Andrew Fastow, as the chief financial officer of Enron, is a 
related party. There is a clear conflict; it is required to be 
disclosed.
    Mr. Green. It was required to be disclosed. I guess just as 
a lawyer, whenever I always sign for something that was 
specific only for, for example, 4(a) or whatever, I always 
wanted to make sure that was under my signature, and I think 
most documents I used to sign with Vinson & Elkins, if there 
was limited responsibility, I always spelled that out.
    Mr. Rogers. I wish I had done that.
    Mr. Green. I understand. Thank you, Mr. Chairman.
    Chairman Tauzin. The Chair thanks the gentleman; his time 
has expired. The Chair recognizes the gentleman from 
California, Mr. Waxman, for a round of questions.
    Mr. Waxman. Thank you very much, Mr. Chairman. Since the 
very first hearing on the Enron scandal before this committee, 
I have sought information about Enron's Special Purpose 
Entities. What we know about these entities is very disturbing. 
While Enron employees made millions with no apparent risk, 
Enron shareholders and employees lost their shirts. And due to 
Enron's remarkable political clout, not a single regulator was 
in a position to prevent this debacle.
    We are now 3 or 4 months into this investigation, yet we 
appear no closer to having a complete list of the partners and 
investors in Enron's many partnerships. Amazingly, in previous 
hearings, neither Enron's executives nor its accountants could 
tell us who the partners and investors were. Well, testifying 
before us today are the lawyers who actually worked on many of 
these partnerships. Surely it will help that you witnesses will 
be able to shed some light on these important questions.
    Let me start with you, Ms. St. Clair. You worked on the 
legal aspects of the Jedi/Chewco transaction. How can we find 
out who the partners and investors were in Enron's many 
partnerships? Can you tell us who has this list and what the 
documents the committee should request to obtain this list?
    Ms. St. Clair. With respect to Jedi/Chewco? I mean that is 
the only transaction that I am familiar with.
    Mr. Waxman. Well, how about any of the partnerships?
    Ms. St. Clair. I am not familiar with, other than looking 
at the partnership agreement itself and who signed it and 
whether it has a list of partners.
    Mr. Waxman. Who signed it--I am sorry, I didn't hear what 
you said. You looked at the partnership agreement and who 
signed it.
    Ms. St. Clair. What partner signed it and whether or not it 
has a list of partners. Some partnership agreements do.
    Mr. Waxman. Okay. And where would we be able to get a copy 
of those lists that were in those agreements, of partners?
    Ms. St. Clair. With respect to--I can only address with 
respect to the Chewco partnership.
    Mr. Waxman. Well, let us go to Jedi/Chewco.
    Ms. St. Clair. Jedi/Chewco?
    Mr. Waxman. Yes. Did that have a list of partners?
    Ms. St. Clair. I think the Chewco partnership agreement is 
in the files and has been available, yes.
    Mr. Waxman. Okay. And do you know whether that has been 
requested by this committee?
    Ms. St. Clair. I don't know.
    Mr. Waxman. Well, I am going to make a request to the 
chairman that he--Mr. Chairman, I would request since Ms. St. 
Clair believes the names of the partners are on the Jedi/
Chewco--are in their files, that we request that information 
for the committee.
    Chairman Tauzin. My understanding, Mr. Waxman, is that 
request is already before Enron and its counsel, and I don't 
think we have yet received all of our responses. We have not 
received all the records, and if there is a need yet under that 
inquiry, that request for documents, to satisfy that, it has 
not been met, either by Vinson & Elkins or by the firm, I would 
renew it here today, and we will renew in writing if we need 
to.
    Mr. Stearns. Point of information, Mr. Chairman.
    Chairman Tauzin. The gentleman is recognized for a point of 
information.
    Mr. Waxman. Mr. Chairman, this won't go against my time, 
will it?
    Chairman Tauzin. It will not go against your time. Depends 
how long his information is.
    Mr. Stearns. I think the gentleman's request is a very 
pertinent one, not only Chewco but for the other ones. As I 
understand from our staff, we have requested these documents to 
find out who the investors were for all these partnerships. And 
I think the question is, Mr. Chairman, how long ago did we 
request this information to find out who the partners were of 
these Special Purpose Entities? Just how long ago has it been, 
just approximately?
    Chairman Tauzin. My understanding it has been since 
December.
    Mr. Stearns. Okay.
    Chairman Tauzin. And we are still literally receiving 
documents from Enron as we speak. As you know, we are still 
trying to understand whether the documents we requested are 
available, or were they part of any potential shredding that 
went on at Enron, and that is still an open question.
    Mr. Stearns. And the last question I have for Mr. Chairman, 
would these gentlemen--was it asked of the law firm these 
documents or Enron? And if we are having a difficult time from 
Enron, can we ask the gentlemen here for the same set of 
documents, because surely they kept a copy?
    Chairman Tauzin. My understanding is the inquiries were 
directed to Enron itself, and obviously if we don't come into 
possession of that information from Enron, we will make a 
request upon Vinson & Elkins for that information. In fact, as 
I said, I am lodging that request publicly today that 
information be provided to us voluntarily, because we 
apparently are having some trouble getting it from Enron 
itself.
    Mr. Stearns. Thank you, Mr. Chairman.
    Chairman Tauzin. Thank the gentleman.
    Mr. Waxman. Thank you, Mr. Chairman.
    Chairman Tauzin. Again, the gentleman has 8 minutes and 17 
seconds to go.
    Mr. Waxman. Well, I appreciate my colleague's very helpful 
line of inquiry, because we are trying to get this information, 
and we have gone all these months without getting it. And I 
would hope the law firms that have it would submit it to us.
    Mr. Sefton, you were general counsel of Enron's Global 
Finance Unit. You worked on certain aspects of the LJM 
partnerships. Can you tell us where we can obtain a list of the 
partners and investors in the LJM partnerships or other 
partnerships? Let us say the LJM partnerships first.
    Mr. Sefton. It is my understanding that the partners in LJM 
are not known to Enron, because LJM was an outside entity, and 
I don't believe that information has been made available to the 
company.
    Mr. Waxman. Who would have that information?
    Mr. Sefton. I believe Mr. Fastow would or I guess maybe now 
Mr. Kopper.
    Mr. Waxman. And, Mr. Chairman, if I might ask whether that 
information has been requested from Mr. Kopper?
    Mr. Sefton. I believe that would be the correct person to 
ask.
    Mr. Greenwood. I am sorry, would the gentleman from 
California reiterate which specific material?
    Mr. Waxman. Well, I have asked Mr. Sefton about the LJM 
partnership, and he thinks that the investors and names of the 
LJM partners are with Mr. Kopper. So I don't know if this has 
been requested, but I think we ought--since he has identified 
where we can get that information, I would hope--rather than 
take up my time now, I will ask the Chair to get that 
information subpoenaed.
    Mr. Greenwood. For the gentleman's information, we have 
requested those documents. We have some documents, and we will 
work with you to make sure that you have the opportunity to 
review them.
    Mr. Waxman. Thank you very much. Mr. Sefton, so you think 
it is there. Who is Mr. Kopper?
    Mr. Sefton. Mr. Kopper is a gentleman who purchased Mr. 
Fastow's interest in LJM2, I understand.
    Mr. Waxman. Do you know who else might have a copy of the--
or a list of the investors in LJM?
    Mr. Sefton. Mr. Fastow, possibly.
    Mr. Waxman. Okay. How about the other partnerships, do you 
have any information about the names of the partners and 
investors in any of the other partnerships?
    Mr. Sefton. I would think that the corporate secretary at 
Enron would have information about all of the entities that 
Enron has an ownership interest in, and I believe the records 
reflect who all the other owners are, if it is not entirely 
owned by Enron. But others here can possibly clarify that in 
case I am wrong.
    Mr. Waxman. Does anybody want to make a clarification of 
that? Mr. Derrick?
    Mr. Derrick. Well, I could--I think it is--it would 
certainly be true that the Enron corporate secretary will have 
a list of all the Enron entities and in terms of the Enron 
ownership would certainly have that. Now, as to a third party, 
for example, LJM, which is not an Enron entity, it is unlikely, 
in my judgment, that that information would be available within 
the Enron corporate secretary's office.
    Mr. Waxman. And where would that information be available?
    Mr. Derrick. Well, again, I assume, with respect to any of 
these third party entities, it would be that entity itself. In 
the same way that Enron would have knowledge of its side of the 
ownership, the third party ought to have records which will 
identify who their owners are.
    Mr. Waxman. So would it be fair to say that Enron would 
have a list of all these entities, but then we have to go to 
the entities to get the names of the investors?
    Mr. Derrick. I think it would be fair to say, Congressman, 
that Enron would have a list of the entities in which it has an 
ownership interest and could identify the Enron side of that 
equation. The other side of the transaction would be, by 
definition, not an Enron entity, and I think it is unlikely, 
though I can't say with any certainty, but unlikely that the 
Enron record would disclose who the owners of that other entity 
are. And so my thought would be that a request to that other--
that third party entity would produce the information that you 
are requesting.
    Mr. Waxman. And do we have a complete list of all the third 
party entities?
    Mr. Derrick. I don't know the answer to that.
    Mr. Waxman. Does Enron have a list of all the third party 
entities?
    Mr. Derrick. Well, Enron should have a list of all of the 
entities in which it, Enron, has an interest, which I hope is 
responsive to your question, I am not sure.
    Mr. Waxman. And what third party entities are there that 
Enron wouldn't have an interest but are connected to the Enron 
issue?
    Mr. Derrick. Well, for example, there could be several 
tiers within the third party entity. I don't pretend to--I 
wasn't involved in these transactions in any detail, but, for 
example, some of the charts that have been shown disclosed that 
there are multi-tiers, and that is what I am referring to.
    Mr. Waxman. So if we are trying to find all the 
information, we start with all the third parties where Enron 
had an interest. Then we would go to each of those separate 
entities and ask them about other entities that they may have 
dealt with.
    Mr. Derrick. Well, that would be my thought, yes.
    Mr. Waxman. Okay.
    Mr. Stearns. Would the gentleman yield just for a second?
    Mr. Waxman. I am afraid to yield to you because I have so 
little time, but I know you probably will get your own time in 
a minute.
    Mr. Derrick, you were Enron's general counsel. Can you tell 
the committee where we would find the necessary documents to 
obtain the list of partners and investors?
    Mr. Derrick. Well, I don't think I have much to add to what 
I just said, Congressman, on that point.
    Mr. Waxman. Okay. Mr. Rogers, you are the only lawyer 
testifying today who still works for Enron, and you also worked 
on aspects of the LJM transactions. Can you tell us where we 
can obtain a list of the partners and investors in LJM?
    Mr. Rogers. Actually, Congressman, I did not work on the 
LJM transactions, but I think part of the problem here is that 
LJM, despite Mr. Fastow's relationship to it, is not an Enron 
entity; it is a separate entity. And I think that is part of 
the problem is that Enron doesn't have access to the records of 
LJM and the investors in LJM. And I think part of the problem 
is the people that would have that information, I don't know if 
it is going to be very helpful to you, as Mr. Sefton said, 
would be Andy Fastow, Michael Kopper, who I understand was the 
individual to whom Mr. Fastow sold his interest, the law firm 
representing LJM, which I am sure they attorney/client 
privilege issues. But a lot of the information that you want on 
investors into these other entities, if they are not Enron 
subsidiaries or subsidiaries that Enron controls or has 
ownership interest in, I think that is part of the delay in 
getting this information. I am not sure Enron has that 
information.
    Mr. Waxman. Well, let me ask this of anybody at the table, 
because you are all Vinson & Elkins lawyers. Does anybody have 
anything else to tell the committee where and how we can obtain 
a list of the partners and investors in all these Enron special 
entities? Anything more to add? Yes?
    Mr. Astin. Congressman, the only thing I would add is that 
I have read news reports that indicate there is litigation I 
believe in the State of Delaware regarding LJM2 that might 
disclose the names of the partners.
    Mr. Waxman. Let me ask each of you, if you would, to 
respond. Are you personally aware of the names of any of the 
investors in the Special Purpose Entities or other 
partnerships? And why don't we start with you, Mr. Sefton?
    Mr. Sefton. I am sorry, am I aware of----
    Mr. Waxman. Are you personally aware of any of the names of 
the investors or partners in this Special Purpose Entities? Can 
you tell us any that you know of and some of the figures that 
are in those entities?
    Mr. Sefton. Well, I know that Enron has formed several 
different--many subsidiaries that I think would be classified 
as Special Purpose Entities, and they may have investors 
ranging from institutional investors, investment banks, pension 
funds.
    Mr. Waxman. I am really asking now what are the categories 
what your personal knowledge is of the participants in these 
special entities?
    Mr. Sefton. I can't identify any, sitting here right now.
    Mr. Waxman. Mr. Chairman, my time is--I would like to have 
this as a request for the witnesses to respond in writing of 
their personal knowledge of the names of any of the special 
entities and participants or investors in those special 
entities. And I will be pleased to hear----
    Mr. Greenwood. We will make Mr. Waxman's request an 
official request from the committee. Did the witnesses 
understand Mr. Waxman's request? We are asking you to supply--
--
    Mr. Waxman. Your personal information----
    Mr. Greenwood. Reiterate your request, please.
    Ms. St. Clair. Which entities are----
    Mr. Waxman. So whatever Special Purpose Entities you know 
about and whatever investors or partners in those entities that 
you know about, I would like you to submit to the committee in 
writing that information.
    Mr. Greenwood. The time of the gentleman has expired. We 
will go to a second round now, and we will just take 5 minutes 
for questions for each of us for the second round, and I will 
begin.
    Let me address some questions to you, Ms. St. Clair, and I 
would refer you to Tab 25. This is the mysterious document that 
surfaced in November of last year about the--that refers to the 
$6 million side agreement to the Jedi/Chewco revolving loan 
agreement, dated December 30, 1997. This was the reason that 
Chewco and Jedi had to be consolidated onto Enron's books and 
prior year financial statements revised back to 1997. If you 
look at the document, you will see on page 2 that there are 
initials next to the Enron signature line. Are those your 
initials, Ms. St. Clair?
    Ms. St. Clair. Yes, they are.
    Mr. Greenwood. Okay. Did you draft this side agreement?
    Ms. St. Clair. I don't recall, but there is a footer on the 
second page that doesn't look like an Enron footer.
    Mr. Greenwood. Say that again.
    Ms. St. Clair. At the bottom of the signature page to the 
left, it doesn't look like an Enron footer to----
    Mr. Greenwood. So you don't think you drafted this 
document. Do you know who drafted it if it was not you?
    Ms. St. Clair. I don't recall.
    Mr. Greenwood. Mr. Astin, have you looked at this document?
    Mr. Astin. I haven't right now, but I have seen it before.
    Mr. Greenwood. Okay. Do you know who drafted the document?
    Mr. Astin. I am not certain, but our records indicate that 
it was likely drafted by Vinson & Elkins.
    Mr. Greenwood. Okay. Ms. St. Clair, do you know why this 
amendment was made to the Jedi/Chewco revolving loan agreement 
in a separate document, given that it was dated the same day as 
the principal agreement it was amending?
    Ms. St. Clair. I don't know.
    Mr. Greenwood. What do your initials signify? Why did you 
put your initials on that document?
    Ms. St. Clair. They signify that as the lawyer that was in 
charge of representing Enron's side in the Chewco transaction, 
that the document satisfied the legal criteria, that it was 
okay for the officer to sign from a legal perspective.
    Mr. Greenwood. Okay. But you don't know why it was drafted 
in a separate document. I mean you looked at it and you decided 
that it was okay for the executive to sign. You had done your 
legal scrub of it----
    Ms. St. Clair. Right.
    Mr. Greenwood. [continuing] but in so scrubbing, you didn't 
ascertain why it was a separate document.
    Ms. St. Clair. I don't recall now why it was a separate 
document; no, sir.
    Mr. Greenwood. Do you recall any discussions in the fall of 
1997 about this side agreement or the creation of reserve 
accounts to benefit Barclay's who was lending money to Big 
River and Little River, which in turn was providing the 3 
percent outside equity in Chewco?
    Ms. St. Clair. At this time, I have no independent 
recollection of that, but as a result of reviewing my notes 
during that time period, there appears to be meetings where 
reserve accounts were discussed.
    Mr. Greenwood. And your notes are those that we find in Tab 
17 of the binder?
    Ms. St. Clair. That is correct.
    Mr. Greenwood. Okay. As you read through these notes, they 
seem to reflect discussions regarding these reserve accounts 
and how they would be funded from distributions to Chewco to 
benefit the Big River/Little River lender, Barclay's. Now, you 
do acknowledge that this subject was discussed in the meetings 
at the time and that this side agreement with your initials on 
it didn't just come out of thin air.
    Ms. St. Clair. That is correct.
    Mr. Greenwood. Okay. Who was at these meetings?
    Ms. St. Clair. I don't have----
    Mr. Greenwood. Let me help you. Your notes reflect that Mr. 
Astin was in at least three of these meetings.
    Ms. St. Clair. That is correct.
    Mr. Greenwood. Mr. Glisan, who handled the accounting 
aspects of this transaction for Enron, was in at least two.
    Ms. St. Clair. Correct.
    Mr. Greenwood. Okay. Was it your understanding that such 
individuals, including Mr. Astin, Mr. Glisan, Mr. Brown and 
other Enron employees and V&E attorneys, were aware of these 
reserve accounts at the time of their creation back in 1997?
    Ms. St. Clair. I can't speak for Vinson & Elkins, Bill 
Brown and Ben Glisan, because they were--Ben was heading up the 
accounting team, and Bill was on the commercial team would have 
had the knowledge of the reserve accounts.
    Mr. Greenwood. Who do you know that had--to your knowledge, 
who had knowledge?
    Ms. St. Clair. To the best of my knowledge, Ben Glisan and 
Bill Brown.
    Mr. Greenwood. How about Kristina Mordaunt?
    Ms. St. Clair. At that time, I reported to her, and she was 
my supervisor on this deal. I don't recall whether she was 
present at any of the meetings, but I did report to her on this 
particular deal, but I was handling the day-to-day activities 
as the lawyer----
    Mr. Greenwood. You told the committee in your interviews 
prior to today that you were aware that a key aspect of the 
Chewco deal was that there needed to be 3 percent outside 
equity in the deal. Weren't you at all concerned when you 
reviewed this side agreement, which in effect transferred $6 
million from Enron Jedi to the purported outside equity 
holders, Big River and Little River? Weren't you concerned 
about that, that it would undo the 3 percent requirement?
    Ms. St. Clair. I don't recall that I was concerned. I would 
have looked to Ben Glisan who was interfacing with Arthur 
Andersen to make sure that it would pass all the accounting 
tests. And in looking at the side agreement now, I am not sure 
that it actually says that the accounts were funded, it just 
allocates a different distribution scheme to funds that Chewco 
may be receiving. As to how the reserve accounts worked 
themselves, we did not have access to those particular 
documents.
    Mr. Greenwood. How about you, Mr. Astin, can you shed any 
light on this?
    Mr. Astin. I would like very much to be helpful to you, 
Congressman, but I don't have any independent recollection of 
these meetings. I was in meetings at which the partnership 
allocations of the Chewco side of the transaction were 
discussed. I was primarily responsible for another aspect of 
the transaction, which was Jedi II and was devoting most of my 
attention to that. This was the first transaction involving 
this accounting issue on which I had worked, and I was not 
familiar with its significance in 1997.
    Mr. Greenwood. You understood the 3 percent rule, right?
    Mr. Astin. I understood, I believe, that the intention of 
the parties was to have 3 percent equity. I did not----
    Mr. Greenwood. Did you understand why they would pick 3 
percent?
    Mr. Astin. My understanding coming into this transaction 
was primarily as a private equity and mergers and acquisitions 
lawyer. I thought that the principal purpose, and I still 
believe one of the principal purposes, of the leverage was to 
maximize the potential returns from the Jedi portfolio of 
assets since it was a mature portfolio of assets that was not 
expected to greatly increase in value so that for it to become 
an attractive equity investment by a third party, which was the 
original plan, it would require additional leverage in order to 
maximize the possibility of return on the investment.
    Mr. Greenwood. Do you know why the side agreement was 
written to begin with, why it was a separate document, why it 
wasn't incorporated in the original document?
    Mr. Astin. I have no memory of having seen it in 1997. I 
only--I mean we have internal files that indicate a copy was 
sent to me, but I was primarily working on another aspect of 
the transaction.
    Mr. Greenwood. You weren't aware that Barclay's had 
insisted on this agreement.
    Mr. Astin. No, I was not.
    Mr. Greenwood. And how about you, Ms. St. Clair, were you 
aware of that?
    Ms. St. Clair. No, I was not.
    Mr. Greenwood. My time has expired. The Chair recognizes 
the gentleman from Florida, Mr. Deutsch.
    Mr. Deutsch. Thank you, Mr. Chairman. Mr. Derrick, if you 
could go to page 8 of the Vinson & Elkins report addressed to 
you, and on that page, under the title--I will read it to you 
if you can't get to it, but on the page, under the title, 
``Potential Bad Cosmetics,'' the report states, ``Concern was 
recently expressed that the transactions involving Condor and 
White Wing and Raptor could be portrayed very poorly as 
subjected to a Wall Street Journal expose or class action 
lawsuit.'' What were your thoughts when you read that 
statement?
    Mr. Derrick. Well, my thoughts were of being concerned, but 
there was nothing that I know of that could have been done at 
this stage to have addressed that issue. It was something that 
if it came, when it came, we would simply have to address.
    Mr. Deutsch. So it didn't surprise or shock you that type 
of activity----
    Mr. Derrick. No, as I expressed, it was a concern to me. 
The issue was given the concern, what at that point could the 
company do about it? It was something that would happen or 
wouldn't happen, and based on what happened we would have to 
address it.
    Mr. Deutsch. Do you recall what Mr. Lay's reaction was?
    Mr. Derrick. I am sorry, I don't recall his reaction.
    Mr. Deutsch. Mr. Dilg, these were your words, at least my 
understanding is that you participated in the letter. Even 
though it wasn't under your signature, it was under your 
supervision. What did those words mean to you?
    Mr. Dilg. We were conveying--concerns had been expressed to 
us during our interviews, and we wanted to make sure the 
company was aware of those concerns. Again, there wasn't--the 
company was taking action or had taken action at the time this 
letter was written to terminate the Raptor vehicles.
    Mr. Deutsch. I mean is there a difference between the term 
``bad cosmetics'' and ``unethical behavior'' or ``illegal 
behavior?''
    Mr. Dilg. I definitely think so. I think we were trying to 
convey that there were aspects of these transactions that in 
hindsight could be portrayed very badly.
    Mr. Deutsch. And, Mr. Derrick, would that be your opinion 
as well or a different take on it? You know, it is described as 
potential bad cosmetics.
    Mr. Derrick. Yes. Congressman, I did not take that to mean 
that there had been unethical conduct or illegal conduct but 
rather that it was simply what it was, that it could be 
portrayed in a very unflattering light, and normally litigation 
would follow that kind of publicity.
    Mr. Deutsch. And Mr. Dilg, if you could try to, in your own 
words, describe the difference between bad cosmetics and 
unethical behavior?
    Mr. Dilg. I think unethical behavior, in my words, in going 
into the transaction, if people had an illegal motive or 
something of that nature not fully disclosed, the motives, et 
cetera. The bad cosmetics arose primarily because of the large 
losses that had been incurred on the assets that were hedged 
against the Raptor vehicles. That had nothing to do with the 
intent of the parties at the beginning of the transactions. It 
was a market factor that happened in the retail electric 
business as well as the broadband business, et cetera, that 
highlighted a lot of the cosmetic issues here. It was just the 
amount of loss that was involved.
    Mr. Deutsch. Mr. Rogers, do you want to add anything to 
this?
    Mr. Rogers. Are you asking my opinion of the report or just 
the----
    Mr. Deutsch. Well, I mean really in terms of this specific 
thing, because, again, someone reading this--you know, I mean I 
read the words exactly, and I think what we have just heard is 
it portrayed in the best possible light, and was that accurate? 
I mean saying that--even this report is saying that exposure of 
what occurred could subject an expose or class action lawsuit, 
and is this something that convinces you that there was 
unethical or, for that matter, illegal activity occurring?
    Mr. Rogers. I can't make a determination that there was 
unethical or illegal activity from that; no, sir.
    Mr. Deutsch. I mean in hindsight, does anyone think that 
these activities or any of these partnership agreements were 
unethical? Do any of you? I mean in the light of hindsight, in 
light of what we know at this point.
    Mr. Derrick. Well, I think let me say first I am sure all 
of us would agree that while the investigation is still ongoing 
and not every side has been heard from, that everyone does 
deserve presumption of innocence. To the extent that it is 
finally determined that in fact there was wrongdoing here, then 
certainly I think we would agree there would have been 
unethical conduct.
    Mr. Deutsch. Right. I mean but no one at this point, based 
on what we know, and particularly--again, I hate to keep 
focusing on Mr. Fastow, but, again, I mean in hindsight, 
looking at his activities as a general partner, my 
understanding is he was telling the board or the board was 
looking the other way or winking that he was not getting 
compensation. I mean it was clear he was getting compensation.
    I think Mr. Waxman's line of questioning is we still don't 
know who else made money. We know for a fact that he made money 
and that tens of millions of dollars in terms of these outside 
partnerships, and yet with his fiduciary responsibility as the 
CFO of the organization and it appears as if misrepresenting to 
the board or the board looking the other way or sticking their 
heads in the sand at that issue.
    Mr. Greenwood. Time of the gentleman has expired. The Chair 
recognizes the chairman of the full committee, Mr. Tauzin, for 
5 minutes.
    Chairman Tauzin. Thank you, Mr. Chairman. We do know from 
Enron who some of those investors were. They reported to us in 
some cases. Ben Glisan, managing director and treasurer of 
Enron Corporation, was an investor in South Hampton Place. 
Kristina Mordaunt was an investor. She was managing director 
and general counsel of an Enron division. Kathy Lynn, vice 
president of an Enron division; Ann Yaeger, an officer employee 
of the company were investors.
    We do know now that they invested rather sums. Kristina 
Mordaunt, $5,800; Ben Glisan, $5,800; Ann Yaeger, $2,900; Kathy 
Lynn, $2,300. As a return on their investments in 6 weeks, 
Kristina Mordaunt made $1 million and Ben Glisan made $1 
million and Ann Yaeger and Kathy Lynn each made $500,000, 
approximately, on their investment. Any of you folks know that 
that was going on before you wrote your October 15 report to 
Mr. Derrick and to Mr. Lay? Mr. Dilg?
    Mr. Dilg. Chairman Tauzin, we were not aware of the 
investors in South Hampton at the time we wrote our report. I 
believe I became aware of that early in November.
    Chairman Tauzin. If you would have known that then, might 
you have written a different report?
    Mr. Dilg. Yes, sir.
    Chairman Tauzin. I would think so. And yet I asked you a 
while ago if you stood by your report, and you said you did. 
Everything was honkey dory and that we didn't need to have 
anybody outside look at this business.
    Mr. Dilg. Based on the facts we knew at the time, I stand 
by that submission.
    Chairman Tauzin. Under the facts you knew at the time, you 
stand by your report. Under the facts you know now, would you 
have advised Mr. Derrick and Mr. Lay differently?
    Mr. Dilg. I think if we had known of the South Hampton 
investors, that would have raised a serious concern. We were--
--
    Chairman Tauzin. Would you advise them then to get an 
outside counsel, an outside auditor to come look at things?
    Mr. Dilg. I am not sure on the auditor point, Chairman, but 
we would have definitely advised further investigation into----
    Chairman Tauzin. Let us talk about what you did know when 
you wrote that report. You did know, did you not, that Michael 
Kopper was running Chewco?
    Mr. Dilg. I did not. We did not look at Chewco.
    Chairman Tauzin. Now, wait a minute, wait a minute. You say 
in your report, and I am going to quote from it, that, ``Based 
on our review of the LJM deal approval sheets and accompanying 
checklist, it appears the approval procedures were generally 
adhered to.'' I am looking at one of them. It says Michael 
Kopper negotiating for LJM. It says that Ben Glisan is 
negotiating for Enron. You didn't see this?
    Mr. Dilg. Could you refer me to which one you are looking 
at?
    Chairman Tauzin. I am looking at Raptor, Tab 20. While you 
are looking for that, I am going to quote Mr. Skilling to you. 
I was asking Mr. Skilling at a previous hearing with reference 
to Chewco, and I asked him then if he had informed Mr. Lay that 
Mr. Kopper was involved with Chewco and with LJM, and he said, 
``I don't recall.'' We got a lot of that. Then I asked him--he 
is not aware of what Ken knew, he said. But Mr. Kopper's 
participation was well-known throughout the company.
    And I started to go to Mr. Jaedicke, and he interrupted me. 
He said, ``By the way,'' this is Mr. Skilling talking, ``it was 
known by Vinson & Elkins who would have had responsibility,'' 
and I said, ``I am sorry, I didn't hear that. Say that again.'' 
And he said, ``His participation in Chewco was also known to 
Vinson & Elkins, to my knowledge. It is my understanding that 
Vinson & Elkins knew that he was involved. I believe that they 
would have identified, to the extent there was a conflict of 
interest, that a waiver needed to be received.''
    I asked did Vinson & Elkins report to Mr. Lay or to you 
after they researched the issue following Ms. Watkins' letter 
that Mr. Kopper might require such a waiver. So at least Mr. 
Skilling believed you knew. I am looking at an approval sheet 
you say that you reviewed in your investigations that shows Mr. 
Kopper is negotiating for LJM. Do you want to tell me now you 
didn't know?
    Mr. Dilg. We did not look--in the investigation that Mr. 
Henderick and I undertook, we did not look at Chewco. I don't 
believe this approval sheet----
    Chairman Tauzin. This is a Raptor sheet.
    Mr. Dilg. Yes. I don't believe it relates to Chewco.
    Chairman Tauzin. Did you know that Kopper was working for 
Raptor and LJM?
    Mr. Dilg. We knew Mr. Kopper, based off of the approval 
sheet, was negotiating on behalf of LJM.
    Chairman Tauzin. Absolutely. In fact, when you flip the 
approval sheet over, there is a question, was the transaction 
done strictly at an arm's length basis, yes or no? It says yes. 
You have got Kopper on one side negotiating for LJM, and you 
have got Glisan on the other side negotiating for Enron, and 
the documents says it is an arm's length transaction. It goes 
on further to say, have all Enron employees' involvement in the 
transaction, on behalf of LJM, been waived by the Enron Office 
of Chairman, in accordance with the Enron's conflict of 
business affairs policy? It is checked off, ``yes.'' Can you 
tell us today whether in fact Mr. Kopper got a waiver?
    Mr. Dilg. For working on this transaction?
    Chairman Tauzin. For working on any transaction on the 
other side of Enron. Apparently Mr. Fastow got such a waiver 
for the conflict of interest rule somewhere, did he not?
    Mr. Dilg. Mr. Fastow got a waiver from the Office of the 
Chairman. It was approved by the full board, as I understand it 
from the board minutes.
    Chairman Tauzin. Right. And what is the procedure for that? 
The Office of the Chairman approves the waiver first, then the 
board approves it after, right?
    Mr. Dilg. I believe that was the procedure followed in 
terms of Mr. Fastow.
    Chairman Tauzin. Mr. Derrick, is that correct?
    Mr. Derrick. Yes. I wanted to clarify that. Under the Code 
of Conduct, actually there is no required approval for anyone 
by the board of directors. There is a----
    Chairman Tauzin. But there is by the Office of the 
Chairman.
    Mr. Derrick. By the Office of the--well----
    Chairman Tauzin. So the Office of the Chairman approved Mr. 
Fastow. Did the Office of the Chairman approve Mr. Kopper, Mr. 
Derrick?
    Mr. Derrick. Was that directed to me, Congressman? The 
answer----
    Chairman Tauzin. Did the Office of the Chairman ever 
approve a waiver for Mr. Kopper?
    Mr. Derrick. I am not personally aware of such an approval.
    Chairman Tauzin. So as counsel, you don't know, and you are 
the general counsel. You don't know whether Mr. Kopper, who is 
negotiating on LJM for LJM, against his own company, you don't 
know whether he got a waiver?
    Mr. Derrick. I don't because there is no requirement that 
waivers come through the Legal Department, Mr. Congressman.
    Chairman Tauzin. You signed the form, didn't you? Didn't 
Mr. Sefton sign it? I am sorry, Mr. Sefton, could you help me 
here, sir. You signed this form. Were you aware Mr. Kopper had 
or did not have a waiver?
    Mr. Sefton. My recollection is that Mr. Fastow advised me 
that he was taking care of the waivers for the LJM people.
    Chairman Tauzin. That is very nice. You can tell he took 
care of it. Did you personally assure yourself before you 
signed this document--you signed yes that the waiver was given. 
You signed yes it was an arm's length transaction. Did you take 
care to assure Mr. Kopper had a waiver?
    Mr. Sefton. I had no reason to believe that Mr. Fastow was 
not telling me the truth on that.
    Chairman Tauzin. So you, as counsel, just took his word?
    Mr. Sefton. I relied on his assurances.
    Chairman Tauzin. And you, Mr. Dilg, when you investigated 
this on behalf of the corporation for Mr. Derrick took the word 
of the folks who signed this document that everything was okay, 
even though you knew Kopper was--at that time you had to know--
was working for LJM and for Enron at the same time.
    Mr. Dilg. We were given the board of directors' minutes 
that approved the participation by Mr. Fastow. They designated 
Mr. Buy and Mr. Causey to guard against the conflict of 
interest. There was a service----
    Chairman Tauzin. But what about Kopper? I am not asking 
Fastow.
    Mr. Dilg. Excuse me, there was a service agreement that 
provided for the services of certain employees of Enron that 
would be utilized on behalf of LJM. Mr. Kopper was listed in 
that service agreement. That service agreement was signed by 
Mr. Causey.
    Chairman Tauzin. But you see what is troublesome for me is 
that you are telling me if you would have known all these 
corporate executives were investing in and playing on the other 
side of the board, at the same time working in very responsible 
positions for the corporation and earning all these amazing 
amounts in 6 weeks, that you would have found that very 
troubling, you would have written a different report. Knowing 
what you know now, you might not stand by that report you 
wrote.
    But what I am troubled by is that you did know that Mr. 
Kopper was involved. You had the approval sheets, you claimed 
you reviewed them. And according to you, this is a report you 
have given to Mr. Derrick and Mr. Lay who have just received a 
report saying that they are running a corporate corporation. 
They have just received a report--I will quote some of the 
things that Ms. Watkins reported again.
    Jeff McMahon was highly vexed over it and he heard 
conflicts of LJM. He complained mightily to Jeff Skilling. 
Cliff Baxter, who, as we know, ended up committing suicide, 
complained mightily to Skilling and to all who would listen 
about the inappropriateness of the transactions with LJM. This 
was a report that you had in your hands that at least you were 
going to look at. You weren't going to look at the accounting, 
you were told not to do that, but you were going to look at the 
conflicts.
    Mr. Dilg. Yes, sir.
    Chairman Tauzin. And you had this report from Ms. Watkins, 
you have got these documents that show a very important officer 
in the corporation negotiating for the outside partnership and 
documents that say this is an arm's length transaction. You 
didn't look behind any of these documents in this so-called 
investigation to find out whether Ms. Watkins was telling Mr. 
Lay the truth?
    Mr. Dilg. The board had established procedures to guard 
against the conflict of interest that they recognized with Mr. 
Fastow's position in LJM. Those were to have the transactions 
signed off by Mr. Buy and Mr. Causey. There was a service 
agreement that we were provided that provided for Mr. Kopper to 
work on behalf of LJM. That agreement was signed by Mr. Causey.
    Chairman Tauzin. Now, we have to press again with this 
hearing because we are checking with some banks. Because 
according to Mr. McMahon, some of these banks were threatened 
or promised other business if they didn't invest in these 
partnerships. You knew about that, didn't you?
    Mr. Dilg. Yes, sir. Mr. McMahon raised that in his initial 
interview.
    Chairman Tauzin. Did you interview any one of these banks?
    Mr. Dilg. We did not.
    Chairman Tauzin. You didn't interview the banks. You didn't 
check on these transactions to see if Mr. Kopper had a proper 
waiver from conflict of interest. Wasn't it your job?
    Mr. Dilg. We were conducting a preliminary review to 
determine whether an additional investigation was necessary.
    Chairman Tauzin. Mr. Derrick, wasn't that your job? Wasn't 
it somebody's job? Mr Sefton, wasn't it one of your jobs to 
make sure that these people negotiating on the other side of 
the table from their own corporation had been properly cleared 
to do so? Whose job was it? According to Skilling, he is 
throwing the blame at you pretty heavily right here. He is 
saying,``It was their responsibility.'' He says, ``I left the 
company. I don't know what they did after I left, but it was 
their responsibility to report to the board and Mr. Lay that 
this man needed a waiver. So don't blame me; blame Vinson & 
Elkins'' is what he is saying. Should we blame Vinson & Elkins?
    Mr. Dilg. No, sir.
    Chairman Tauzin. Who should we look to? Who should Enron, 
who should Mr. Lay look to when he asked the question of, ``Why 
weren't we told Mr. Kopper was in a conflict of interest 
position, that he wasn't negotiating at arm's length, that he 
never received a waiver to do this.'' Who should bear the 
responsibility for having, No. 1, known that and not done 
something about it, and No. 2, checked on it when Sherron 
Watkins went to the president of the corporation and said, 
``You have got a corrupt company; check into it''?
    Mr. Derrick. I think, initially, Congressman, the 
responsibility lies with, in this case, Mr. Kopper. Under our 
Code of Conduct, each employee is required to certify----
    Chairman Tauzin. You have got to be kidding me, Mr. 
Derrick. Any employee could go negotiate against a company and 
it was up to them to come and get a waiver? And you guys were 
signing these documents that said they had gotten waivers and 
you never checked to see if they did?
    Mr. Derrick. I am not saying that I have signed a 
document----
    Chairman Tauzin. I have got your Code of Conduct in front 
of me. You are not supposed to engage in any outside activity 
or enterprise which would interfere in any way with job 
performance. You don't think Mr. Kopper was engaging in 
enterprises that interfered with his performance? You don't 
think these employees who were investing $5,000 and reaping $1 
million reward in 6 weeks were in a conflict of interest 
position?
    Mr. Derrick. Well, that is exactly my point. They were, and 
under our Code of Conduct, each of those individuals were 
required to approach the chairman and chief executive officer 
to seek an approval.
    Chairman Tauzin. Lawyers of the company had to know they 
were doing that. You admitted that to us. You have admitted to 
us that you knew Kopper was doing that. Whose job was it to 
tell them, ``You are in violation of the Code of Ethics. You 
are fired.'' Or go to the president and say, ``Get rid of these 
people. They didn't have the courtesy of complying with your 
Board of Ethics requirements--your Code of Ethics 
requirements.''
    Mr. Derrick. Well, initially----
    Chairman Tauzin. Whose job was that?
    Mr. Derrick. Well, in my judgment, it was initially the 
employee's. To the extent that people in the company became 
aware that no conflict had been received, that was something 
that they should have reported. But there isn't a way that I 
know of for a company to, other than relying on the good faith 
of its employees, under a Code of Conduct, who are required to 
report conflicts of interest. That is where it all starts.
    Chairman Tauzin. But what is a requirement of a lawyer who 
is a counsel for the corporation who knows that an employee is 
violating the Code of Ethics?
    Mr. Derrick. Well, if----
    Chairman Tauzin. What is the requirement of a counsel?
    Mr. Derrick. If a lawyer knows that----
    Chairman Tauzin. Yes.
    Mr. Derrick. [continuing] as well as any other employee of 
the company, if they know that, they should have reported it.
    Chairman Tauzin. And you knew that Mr. Kopper was working 
for LJM and had not received a waiver.
    Mr. Derrick. I am sorry, Congressman, I wasn't working on 
these transactions. I wouldn't know Mr. Kopper if he walked in 
the conference room today.
    Chairman Tauzin. Mr. Sefton, did you know Mr. Kopper was 
working for LJM, and you don't think you had any responsibility 
to do anything except Mr. Fastow's word, and Mr. Fastow got his 
waiver, he is already working and making millions.
    Mr. Sefton. At the time that I received those assurances, I 
felt justified in relying upon them.
    Chairman Tauzin. Mr. Chairman, you know what we have? We 
have got the same kind of situation we had with Arthur Andersen 
when they said the lawyers let the accountants make the 
decisions about what their legal responsibilities were. I can't 
believe that the lawyers at a great American corporation would 
let the employees decide whether they could be in conflict of 
interest like this and make these investments and reap these 
benefits out of the very company that it was supposed to have a 
fiduciary responsibility for. These are major offices of your 
corporation. They are not workers at the bottom of the ladder; 
they are workers at the top of the ladder.
    It is amazing to me that you guys could write a report to 
the chairman of the corporation after Ms. Watkins put herself 
way out on a limb to tell you all that this was going on, and 
you never bothered to talk to the banks, you never bothered to 
call in Mr. Kopper and say, ``Did you get a waiver? Are you 
operating in conflict of interest? Are you operating in a way 
detrimental to the corporation when you owe your fiduciary 
obligation to the corporation?'' It is amazing to me that you 
could issue that paper to Mr. Lay, which basically said, 
``Don't believe that lady; everything is fine. Everything is 
find. Don't hire any other outside lawyers. Look at what we 
did? For heaven's sake, don't hire any more accountants. 
Everything is okay. Now, just tell that lady we looked at it 
real carefully and everything is good.'' That is basically what 
you did.
    Mr. Dilg. Can I respond?
    Chairman Tauzin. Please respond. Yes, sir, please.
    Mr. Dilg. I think there are two things with regard to Mr. 
Kopper that are different. One, his investment in the Chewco 
matter, which was not raised by Ms. Watkins' letter and was not 
at all within the scope of our inquiry, as far as looking at 
Chewco. Mr. Kopper did negotiate on behalf of LJM and was 
reflected as doing so in the LJM approval sheets that were 
signed off on by the two people that the board had established 
to make sure that the deals were done on a basis that was 
favorable to Enron. There was a service agreement that was 
signed by Mr. Causey on June 30, 1999 that recognized Mr. 
Kopper's participation----
    Chairman Tauzin. But Causey and Buy are in the Office of 
the Chairman, you know that. They can't give waivers, you know 
that. You just testified, or Mr. Derrick did, that the Office 
of the Chairman was the only one that could give a waiver, not 
Causey and Buy. Is that right?
    Mr. Dilg. That is correct. We did not check on the waiver 
of the Code of Ethics issues. There was an agreement signed by 
the person that the board had designated to look after Enron's 
side on this.
    Chairman Tauzin. What do you think--and this is my final 
question, Mr. Chairman, I apologize--what do you think when you 
reviewed these approval sheets and you wrote a letter to Mr. 
Derrick, extensively to him, and to Mr. Lay, saying, ``We 
checked the approval sheets, and everything looks okay''? What 
do you think when you saw a blank signature place for Mr. 
Skilling? Didn't that alert you that something is maybe amiss 
here?
    Mr. Dilg. We did note in our letter that the Office of the 
Chairman had not signed except on rare occasion. We wanted to 
bring that to their attention. The board minutes that we----
    Chairman Tauzin. Well, no, you said it differently. You 
said that in most instances there was no approval signature for 
the Office of the Chairman except for several significant 
transactions. And that sort of leaves the impression the only 
time he had to sign was for significant transactions. What was 
your understanding of the approval process? Did the Office of 
the Chairman have to approve these transactions?
    Mr. Dilg. The board minutes that we had that approved the 
LJM2 transaction and set up the approval process required Mr. 
Buy and Mr. Causey to approve matters on behalf of Enron. There 
was nothing in the board minutes that we had that required a 
signature by the Office of the Chairman.
    Chairman Tauzin. Mr. Jaedicke testified that his 
understanding of the controls was that approval was required of 
the Office of the Chairman, or at least a review was required. 
We got into whether or not approval and review, but at least 
review by the Office of the Chairman. You don't believe that is 
true?
    Mr. Dilg. I understand from the Powers report, which was 
the first time that I was aware of the information, that at a 
Finance Committee meeting in the fall of 2000, I believe, there 
was discussion of approval by the Office of the Chairman, and 
that was put in. Those minutes were not part of the minutes we 
were given in connection with our review. I think those minutes 
basically related to the formation of a new entity called LJM3 
that didn't go forward. I am presuming that is why we didn't 
see them. We were not present at that meeting.
    Chairman Tauzin. But you did see a blank space.
    Mr. Dilg. We did, and we noted that in our report.
    Chairman Tauzin. What do you think? What do you think when 
you saw a blank space from the chief executive of the 
corporation on the approval forms?
    Mr. Dilg. We felt that it was worth noting in our report 
that those spaces had not been filled in.
    Chairman Tauzin. Wasn't it a red flag?
    Mr. Dilg. It was enough of a flag that we felt like it 
should be brought to Mr. Derrick's attention.
    Chairman Tauzin. But you never, never, never tried to talk 
to Mr. Skilling.
    Mr. Dilg. We did not try to talk to Mr. Skilling.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Greenwood. Thank you, Mr. Chairman. It is amazing how 
much inquiry you can squeeze into a 5-minute period.
    The Chair recognizes the gentlelady from Colorado for 5 
minutes.
    Ms. DeGette. Thank you, Mr. Chairman. And Chairman Tauzin, 
when you were asking about the Code of Conduct, it occurred to 
me we have reached new heights now, because it is not just the 
fox guarding the hen house that we used to think about a week 
ago, now it has become clear it is the fox guarding the fox. I 
mean----
    Chairman Tauzin. The hen is guarding the fox.
    Ms. DeGette. Yes, or something. You know, the exact same 
people who are the evildoers, who are committing these acts, 
are the ones that are supposed to go somehow to the chairman 
and say, ``Oh, by the way, I have these conflicts of 
interest.'' It is unbelievable to me.
    But I actually have a different line of questioning. What I 
want to talk about is Mr. Fastow's compensation, because as I 
read the Powers report and also some of the board committee 
minutes, it looks to me like the Compensation and Management 
Committee and also the Finance Committee told Enron that they 
should figure out what Mr. Fastow's compensation was from LJM1 
and LJM2. Is that correct, Mr. Derrick? In your view, were you 
guys supposed to figure out how much Mr. Fastow was making?
    Mr. Derrick. I don't recall a specific instruction from the 
committee, Congresswoman. I think the compensation would come 
up in terms of what is disclosed in the proxy statement. I 
think what you may be referring to----
    Ms. DeGette. But do you think that you should have found 
out how much Mr. Fastow was making?
    Mr. Derrick. Well, the teams that were working on the proxy 
disclosure issues did examine that question, and my 
understanding----
    Ms. DeGette. Did you know how much Mr. Fastow was making?
    Mr. Derrick. Pardon me?
    Ms. DeGette. Did you know how much Mr. Fastow was making 
from the LJM transactions?
    Mr. Derrick. I did not. I was----
    Ms. DeGette. Did anybody at Enron, to your knowledge?
    Mr. Derrick. Not to my knowledge. My understanding is that 
the team that was working on it had concluded it was simply not 
practical to ascertain what the compensation was. But I will 
need to----
    Ms. DeGette. Did anybody ever ask Mr. Fastow?
    Mr. Derrick. I can't speak to that.
    Ms. DeGette. Who was running this team that was supposed to 
be finding it out?
    Mr. Derrick. Well, it would have been initially, I think, 
Mr. Mintz, in the Global Finance Group, and other people 
working with him.
    Ms. DeGette. Okay. Do you know if Mr. Mintz tried to find 
out from Mr. Fastow what his compensation was?
    Mr. Derrick. I don't personally have knowledge of that.
    Ms. DeGette. Mr. Rogers, do you think that management 
should have obtained Mr. Fastow's compensation while he was at 
LJM--or involved with LJM?
    Mr. Rogers. Yes, ma'am; it is my understanding they did try 
to find that out.
    Ms. DeGette. And did you think they were supposed to find 
that out?
    Mr. Rogers. Yes.
    Ms. DeGette. And in fact when you were interviewed on 
January 20 by Wilmer Cutler you talked to them about 
discussions that you had in a meeting in early 2001 whether 
anybody knew the amount of compensation that Mr. Fastow was 
receiving from the LJM transactions. Do you remember that 
meeting in early 2001?
    Mr. Rogers. I don't remember the date, but, yes, I remember 
asking that.
    Ms. DeGette. Okay. And did you ask anybody to find that 
information out?
    Mr. Rogers. Yes.
    Ms. DeGette. You were concerned about that issue, weren't 
you?
    Mr. Rogers. I knew it was a disclosure issue, yes.
    Ms. DeGette. And is that why you were concerned about it?
    Mr. Rogers. Yes.
    Ms. DeGette. Okay. And wasn't there a lot of conversation 
around Enron that Mr. Fastow might need to disclose this 
compensation from LJM on the 1999 and 2000 proxy statements?
    Mr. Rogers. Not a lot of conversation that I was a party 
to, but, yes, I understand it was discussed.
    Ms. DeGette. Okay. But you were a party to conversations 
that that information had to be obtained.
    Mr. Rogers. Yes. I have read a lot of memos relating to 
that, yes.
    Ms. DeGette. You have read a lot of memos relating to that?
    Mr. Rogers. Yes.
    Ms. DeGette. Okay. And do we have those memos, do you know?
    Mr. Rogers. I believe you do.
    Ms. DeGette. Okay.
    Mr. Rogers. I am confident you do.
    Ms. DeGette. Did you ever try to get Mr. Fastow's 
compensation from LJM?
    Mr. Rogers. I didn't personally.
    Ms. DeGette. Did you direct someone else to get that 
compensation?
    Mr. Rogers. I didn't direct someone, but someone undertook 
to do so, yes.
    Ms. DeGette. Who did?
    Mr. Rogers. Mr. Mintz.
    Ms. DeGette. Mr. Mintz. And do you know what Mr. Mintz did 
to try to get his compensation, to get Mr. Fastow's 
compensation from the LJM transactions?
    Mr. Rogers. It is my understanding that he met with Mr. 
Fastow, at least according to his memos, at some length.
    Ms. DeGette. And as far as you know, Mr. Mintz was never 
successful in getting those compensation figures from Mr. 
Fastow, was he?
    Mr. Rogers. I don't know if he was or was not. What Mr. 
Mintz reported was that the compensation was not determinable 
after his conversations with----
    Ms. DeGette. Did Mr. Mintz say why?
    Mr. Rogers. He makes references to it in his memo. I don't 
remember the exact reasons. I believe it had something to do 
with--well, first of all, a number of the transactions in that 
year had not closed, so it was not determinable. With one of 
the other transactions, there was an agreement between, as I 
understand it, between Mr. Fastow and LJM, which rendered 
whatever he had been paid something that was not a final number 
that could be adjusted.
    Ms. DeGette. Well, okay, you didn't have the final numbers, 
but did you ever try to get a ballpark figure? Do you know if 
Mr. Mintz ever got a ballpark figure?
    Mr. Rogers. I don't know if he did or not.
    Ms. DeGette. Didn't that concern you that Mr. Mintz was 
unable to get this information that was supposed to be on the 
financial statements?
    Mr. Rogers. I don't think it is on the financial 
statements.
    Ms. DeGette. Okay.
    Mr. Rogers. It may be on the proxy statements. But Mr. 
Mintz is an outstanding lawyer. He undertook to get the 
information.
    Ms. DeGette. He testified in front of us, so, yes, we all 
love him, but that is not my question.
    Mr. Rogers. Well, what he reported back to----
    Ms. DeGette. My question is did he ever try to get at least 
a ballpark figure of what Mr. Fastow was making?
    Mr. Rogers. I wasn't a party to the conversation between 
Mr. Mintz and Mr. Fastow, but what Mr. Mintz reported back was 
the number was not determinable at that time.
    Ms. DeGette. Okay. Have you ever gotten that figure, to 
this date?
    Mr. Rogers. I have not personally gotten the number. The 
only number I am aware of is the $30 million number that has 
been published.
    Mr. Greenwood. Time of the gentlelady has expired.
    Ms. DeGette. So that is the number that--I would ask 
unanimous consent for 1 additional minute.
    Mr. Greenwood. Without objection. We are trying to be 
sensitive to the members' travel schedules.
    Ms. DeGette. Thank you. I have one too, Mr. Chairman.
    Mr. Rogers. I am sorry, is there an open--is there a 
question?
    Ms. DeGette. Yes. The question I was asking was that is the 
figure you read in the newspapers, the $30 million?
    Mr. Rogers. I believe that number first was reported in an 
8K current report that Enron filed subsequent to the SEC 
investigation, in response to the SEC's questions. And my 
understanding, if my recollection is correct, that the members 
of the board spoke with Mr. Fastow.
    Ms. DeGette. Okay. If you had known that $30 million at 
that time in 2001, would you have been concerned about the red 
flag that might raise as to these transactions?
    Mr. Rogers. If I had known at the time that----
    Ms. DeGette. Yes.
    Mr. Rogers. [continuing] the number was $30 million?
    Ms. DeGette. That was $30 million.
    Mr. Rogers. Absolutely.
    Ms. DeGette. Do you know to this day how much the real 
number ever was?
    Mr. Rogers. I do not.
    Ms. DeGette. Mr. Derrick, did you know at that time how 
much Mr. Fastow was making from the LJM transactions?
    Mr. Derrick. No. I had been told by the team that it was 
not practical to ascertain that because of these various open 
positions.
    Ms. DeGette. And have you ever yet found out how much he 
made from those transactions?
    Mr. Derrick. The only thing I can add is, what Mr. Rogers 
referred to, was when the board elected or chose two of its 
members to sit down with Mr. Fastow and ask that question. And 
the number that has been referred to is, I believe, the number 
that Mr. Fastow told to those two members of the board.
    Ms. DeGette. And that was in the Powers report?
    Mr. Derrick. I believe that is in the Powers report.
    Ms. DeGette. Okay. And if you had known at least that $30 
million at the time, would that have raised a red flag for you?
    Mr. Derrick. Yes, Congresswoman; it certainly would have.
    Ms. DeGette. And to this day----
    Mr. Greenwood. The time of the gentlelady----
    Ms. DeGette. [continuing] do you have any idea how much Mr. 
Fastow made from LJM?
    Mr. Derrick. The only information I have is what I have 
just reported.
    Ms. DeGette. Thank you.
    Mr. Greenwood. The Chair recognizes the gentleman from 
Florida for 5 minutes.
    Mr. Stearns. Thank you, Mr. Chairman, and let me just say 
to the witnesses you came here voluntarily and we appreciate 
what you are doing, and we understand that you haven't had 
lunch and so we are very sensitive to that. But I think what we 
are all having trouble with is that people were making large 
sums of money and no one on this panel has any concern or 
doesn't stop to blow the whistle. It is like the three monkeys 
who see no evil, hear no evil and speak no evil. And you folks 
are unfortunately communicating that kind of sense to us that 
you would not have changed a thing and you did nothing wrong. I 
mean in retrospect, Mr. Derrick, do you think there has been 
any corporate malfeasance at all during this whole process?
    Mr. Derrick. Well, you say change nothing. In my opening 
testimony, I have said that had I been given the gift of 
clairvoyance, had I been able to foresee these events, I 
certainly would have done things differently. In fact, if it 
were within my power to go back and change anything, whatever 
it may be, that would have prevented us from being where we are 
now, certainly, Congressman, I would have done that.
    But in terms of corporate malfeasance, I have no reason to 
believe that--when the board considered this, it honestly 
believed that it was taking decisions that it thought was not 
adverse to the best interest of Enron and put in place 
procedures that they honestly believed would protect those 
interests.
    Mr. Stearns. So today, Mr. Derrick, do you think there has 
been any corporate malfeasance, just yes or no?
    Mr. Derrick. Well, if the allegations that have been made 
at the end of the day prove to be true, then the answer is yes.
    Mr. Stearns. Mr. Dilg, do you think there has been 
corporate malfeasance based upon what you have seen?
    Mr. Dilg. We were very disheartened to see some of the 
things that came out in November. The participants in South 
Hampton was a great surprise to us.
    Mr. Stearns. So you see things today that would indicate, 
if true, it is corporate malfeasance.
    Mr. Dilg. The ownership of and interest in a company doing 
business with Enron without going through the proper Code of 
Conduct waivers, et cetera, raises grave concerns to me.
    Mr. Stearns. The question has come up of a $40 million that 
Mr. Fastow, the CFO, made. Mr. Derrick, you met with 10 members 
of our staff, one of those was on a telephone hookup. And per 
that discussion they had with you, you left a message with Lay 
and Skilling that it was not practical to determine Fastow's 
compensation but that it would be disclosed in the year 2002 
and that you were not aware of Fastow's compensation at that 
point. But for the September 1 board meeting, you said you 
wrote a list of questions for the board to ask Mr. Fastow, and 
ultimately it was decided the chairman of the Executive 
Committee, John Duncan, and the Compensation Committee would 
sit down with Mr. Fastow outside the meeting, which they did, 
you said. At a board meeting after that, they reported that 
Fastow made $40 million. Is that true? Do you still stand by 
your statements to our staff?
    Mr. Derrick. With respect--yes, I do, with one exception. I 
believe I made it clear that as to the $40 million I can't be 
clear as to whether that was the amount. It may have been $30 
million. But as to the other things you said, yes, I do, 
Congressman.
    Mr. Stearns. So you did not know that he made--let us say 
$40 million just for the discussions--that he made $40 million 
on these business transactions, and you did not know that 
before the September 1 board meeting. Is that true?
    Mr. Derrick. I am taking your word it is September 1, but, 
yes, that board meeting. Yes, that is correct.
    Mr. Stearns. Mr. Sefton, did you know that before September 
1 board meeting that Mr. Fastow was making $40 million?
    Mr. Sefton. No. And was that September 1, 2001?
    Mr. Stearns. Yes, 2002.
    Mr. Sefton. 2002. I left Global Finance in 2000.
    Mr. Stearns. Okay. I have--it is Tab number 22 that Mr. 
Fastow signed. It is a proxy statement talking as of holdings 
of equity securities in the company. And on the last page, he 
talks about, in response to questions, he says--they are 
talking about his salary and his affiliates and his shares, and 
he said, ``I suggest that you talk to Scott Sefton if you want 
to talk about my arrangements, my salary, and that Scott Sefton 
is preparing a draft of the disclosure relating to these 
transactions, which he will provide shortly.'' Do you remember 
preparing a draft of disclosure on Mr. Fastow?
    Mr. Sefton. Yes.
    Mr. Stearns. And what did that disclosure say?
    Mr. Sefton. It was for the proxy for 2000.
    Mr. Stearns. And it did not talk at all about his salary 
and how much his compensation was.
    Mr. Sefton. The disclosure that I worked on was for the 
related party transactions.
    Mr. Stearns. Did you have an understanding of how much he 
made before you left the company?
    Mr. Sefton. No.
    Mr. Stearns. So all during the process you never understood 
it. You never knew how much he made.
    Mr. Sefton. No.
    Mr. Stearns. Mr. Rogers, did you?
    Mr. Rogers. No, sir.
    Mr. Stearns. And Mr. Dilg, do you?
    Mr. Dilg. I did not know until the results came back from 
the meetings with Mr. Duncan and the other board member.
    Mr. Stearns. Mr. Astin?
    Mr. Astin. No, Congressman, not until the report that Mr. 
Rogers referred to, the 8K filing that first disclosed the 
number.
    Mr. Stearns. And Ms. St. Clair? okay. Thank you, Mr. 
Chairman.
    Mr. Greenwood. Thank you. The Chair recognizes the 
gentleman from California for 5 minutes.
    Mr. Waxman. Thank you very much, Mr. Chairman. One of the 
most disturbing facts to emerge from Congress' investigation of 
the Enron collapse is the extent to which the company lobbied 
for and took advantage of inadequate regulation and oversight 
by legislators and regulators. If not for Enron's political 
connections and power, the company's true financial status 
might have been uncovered long ago. I would like to ask some 
questions about those political connections.
    From 1989 to 2001, Enron's PAC, Political Action Committee, 
and its employees and family members gave close to $6 million 
to Federal candidates and political parties. Press reports 
indicate that employees were, at the very least, strongly 
encouraged to make political contributions. One press report 
has cited a 2000 company memo that recommended employees give 
money to President Bush's campaign. Are any of you aware of 
this particular memo?
    Mr. Derrick. It is certainly possible that I would have 
seen it at the time, Congressman. I don't have specific 
recollection of it now.
    Mr. Waxman. Okay. Any of the others. Mr. Sefton, are you 
aware of any memo asking employees to contribute?
    Mr. Sefton. I don't recall a memo relating to the Bush 
campaign, but the employees of the company were asked from time 
to time to consider contributions to, I think, a Political 
Action Committee that was set up by the company.
    Mr. Waxman. And how were they asked, through a memo, 
through written communication?
    Mr. Sefton. Probably a memo or an e-mail.
    Mr. Waxman. Anybody else recall seeing any memos or being 
aware of this information? Mr. Rogers?
    Mr. Rogers. Yes, sir. I don't recall any specific request 
to support a specific candidate. I do recall getting Political 
Action Committee materials. The company did--there was no 
obligation on any employee to join the PAC, but the company--
all the employees were given the opportunity to, and I think 
the company did endorse being a member of the PAC. But there 
were no--nothing negative would happen to an employee if he did 
not join the PAC.
    Mr. Waxman. Were any of them, when they were told they 
could voluntarily do this, given a suggested amount they ought 
to contribute?
    Mr. Rogers. Not to my recollection.
    Mr. Waxman. Anybody else have a----
    Mr. Rogers. It is possible, I don't recall.
    Mr. Waxman. Well, according to a press story, low-level 
employees were encouraged to give $500, and senior executives, 
at least $5,000. Do you know whether that would have been 
accurate?
    Mr. Rogers. I don't recall, but it would be very easy to 
find out.
    Mr. Waxman. Did any of you, as lawyers for Enron, advise 
the company on campaign-related matters?
    Mr. Derrick. No, but we did have an employee who was 
charged, not as 100 percent of her job, but as part of her job 
was advising the PAC issue.
    Mr. Waxman. Okay. And could you identify for the record, if 
not right now, who the employee had been----
    Mr. Derrick. Certainly; I will be happy to.
    Mr. Waxman. And, Mr. Rogers, you say it would have been 
easy to find out if a memo had been sent out. How would we go 
about finding out that information?
    Mr. Rogers. I would guess the company would have records of 
the materials that it would send out with respect to the Enron 
PAC.
    Mr. Waxman. The Washington Post reported that a letter was 
allegedly sent by Ken Lay to certain employees in the spring of 
1999 asking for contributions to the Bush campaign. One 
recipient of the letter, according to the press report, said it 
was a rather menacing letter. Are any of you aware of this or 
other letters or memos from Ken Lay encouraging employees to 
contribute to the Bush campaign?
    Mr. Derrick. Congressman, I may have received a letter, not 
in Mr. Lay's capacity as the chairman of Enron, but in this 
private capacity. I know he was active for a number of 
candidates, one of whom was President Bush. And, certainly, I 
made a number of contributions to various candidates, and one 
of those would have been to Mr. Bush.
    Mr. Waxman. And when you gave contributions to a number of 
candidates, were they at the request of Mr. Lay?
    Mr. Derrick. There would have been some of those, but it 
was my philosophy to try to support good candidates on both 
sides of the aisle. And only a small fraction of those would 
have been the result of any communication from Mr. Lay. But, 
again, it would have been in Mr. Lay's capacity, not as 
chairman of Enron but rather as a private citizen.
    Mr. Waxman. Are you aware of any campaign contributions 
being reimbursed, like bonuses or other compensation intended, 
in effect, to reimburse employees for what they gave 
politically?
    Mr. Greenwood. Last question, Mr. Waxman.
    Mr. Waxman. I would like to have Mr. Rogers answer it was 
well.
    Mr. Derrick. I have no personal recollection of any such 
reimbursement.
    Mr. Waxman. Mr. Rogers, are you aware of that?
    Mr. Rogers. Let me make sure I understand the question. 
Would you restate that, please?
    Mr. Waxman. What I am trying to find out is whether you are 
aware of any additional compensation that was given to 
employees or executives to make up for the contributions they 
would have given to campaigns?
    Mr. Rogers. I am not aware of that.
    Mr. Waxman. Are any of you aware of that?
    Mr. Greenwood. Apparently not. The time of the gentleman 
has expired.
    Mr. Stearns. Mr. Chairman, just a point of information. I 
think in all fairness, if the question is going to be asked of 
the President, I think the gentleman from California should 
also ask it of President Clinton too, his same questions.
    Mr. Waxman. I think that is reasonable. I want to know if 
any political campaigns.
    Mr. Greenwood. I think the record has demonstrated that the 
Enron employees and Enron Political Action Committee, as well 
as Enron soft money, went generously to both sides of the 
aisle, this election cycle and previous election cycle.
    The Chair thanks the gentlemen and lady for their testimony 
today. This committee has held 4 days of hearings on the 
collapse of Enron, and we have done that because this is the 
largest bankruptcy in the history of the country. We have done 
that because not only did 4,000 Enron employees, at least, lose 
their jobs, pensions lost, but teachers' funds, retirement 
funds across the country were lost, $70 billion. Funds invested 
by parents for their children's education lost because of 
investments in Enron. There has been a lot of human suffering 
as a result of this collapse, not the least of which, of 
course, is the tragic death of Mr. Baxter.
    It has been interesting to this member that this collapse 
happened at a time when all of the commodities in which this 
company was trading were in high demand in the country. You had 
good supplies, you had great demand, all of the economic 
reasons for this company to succeed were in place. And yet it 
failed. The accountants have come in and told us that it didn't 
fail because of anything they have done, no one from the 
company's management has said it has failed because of anything 
that they have done wrong, and none of you have indicated today 
that the company because of anything that you have done wrong.
    My final question for you, in retrospect and without the 
gift of clairvoyance, as you look back upon this failure, what 
happened? Who caused the failure of Enron. Mr. Derrick?
    Mr. Derrick. Well, there are brighter people than I who are 
looking at this issue. From my perspective, Congressman, it was 
a loss of confidence and panic selling. I believe--I am not a 
businessman, I am not a financial person, but certainly it was 
my sense that the company still had enormous opportunities. 
There was, as some have said, a run on the bank----
    Mr. Greenwood. It wasn't loss in confidence that you could 
sell natural gas and electricity and--it wasn't like 
automobiles were made and people lost confidence in the ability 
to sell buggy whips, was it? It was loss of confidence in the 
management, was it not?
    Mr. Derrick. I can't speak to that. I can't say that you 
are wrong on that. I don't know. But experiencing from the 
inside, it was simply a panic sale of our shares based on what 
seemed to be a loss of confidence, and I think had the company 
had some opportunity to have had a circuit breaker in place, 
that it might have saved many, many people from the tragedy 
that they have undergone.
    Mr. Greenwood. Well, it would be my final observation--
first, without objection, I would like to put into the record 
the documents to which we have referred today and identified 
as, ``O&I Financial Collapse of Enron, March 14, 2002.''
    My only comment in closing would be that once again the 
commentary from the witnesses is that the company failed 
because of loss of confidence of the investors, which sounds an 
awful lot to me like blaming the victims, the people who lost 
the money failed because they failed to have confidence in the 
company itself.
    This hearing is adjourned.
    [Whereupon, at 3 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
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