[Senate Hearing 107-1139]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1139
THE ROLE ENRON ENERGY SERVICE, INC., (EESI) PLAYED IN THE MANIPULATION
OF WESTERN STATE ELECTRICITY MARKETS
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JULY 18, 2002
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska
Virginia CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon SAM BROWNBACK, Kansas
MAX CLELAND, Georgia GORDON SMITH, Oregon
BARBARA BOXER, California PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
Jeanne Bumpus, Republican Staff Director and General Counsel
C O N T E N T S
----------
Page
Hearing held on July 18, 2002.................................... 1
Statement of Senator Boxer....................................... 4
Prepared statement........................................... 4
Prepared statement and letter of Elisa Hollis................ 24
Statement of Senator Breaux...................................... 4
Statement of Senator Carnahan.................................... 6
Statement of Senator Cleland..................................... 5
Statement of Senator Dorgan...................................... 1
Prepared statement of Felix G. Rohatyn, Rohatyn Associates
LLC........................................................ 48
Statement of Senator Fitzgerald.................................. 3
Statement of Senator McCain...................................... 2
Statement of Senator Nelson...................................... 6
Letter dated May 4, 2001, from Hon. Thomas E. White to Tom
Taylor..................................................... 30
Statement of Senator Smith....................................... 19
Prepared statement........................................... 19
Statement of Senator Wyden....................................... 3
Witnesses
White, Hon. Thomas E., Secretary of the Army..................... 7
Prepared statement and timeline.............................. 8
THE ROLE ENRON ENERGY SERVICE, INC., (EESI) PLAYED IN THE MANIPULATION
OF WESTERN STATE ELECTRICITY MARKETS
----------
THURSDAY, JULY 18, 2002
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 11:15 a.m. in
room SR-253, Russell Senate Office Building, Hon. Byron L.
Dorgan
presiding.
OPENING STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. We will now begin our next hearing, which
is a full Committee hearing. We will ask Secretary White, who
is the sole witness. Secretary White, why don't you have a
chair at the witness table, if you would.
Mr. Secretary, we appreciate very much your willingness to
come to testify today before the Senate Commerce Committee. As
you know, the Subcommittee of the Senate Commerce Committee
that deals with consumer affairs and related issues has been
holding a series of hearings which include hearings on Enron
issues and also corporate responsibility issues. Let me say
first of all that we take no pleasure in inviting you to come
today, and I expect you take no pleasure in being here. You
have had a long and distinguished career serving your country,
and we salute you for that, but as you know, we have had
hearings before the Subcommittee and the full Committee dealing
with the Enron Corporation; it is my feeling, based upon what
we have determined from a range of information, that there was,
in fact, a culture of corruption in that corporation.
You worked in an executive capacity for that company. We
had, for example, most recently a hearing that dealt with the
issue of California pricing for energy and, in that hearing, we
heard testimony about schemes that were used in California for
the pricing of wholesale energy, schemes that were called,
among other things, Get Shorty, Fat Boy, and Death Star.
In testimony at that hearing, it raised questions about how
the energy pricing occurred in the State of California, and
whether a division of Enron that you were involved with which
retailed electricity in California was involved in any way with
respect to the wholesale schemes that were involved. I use the
word schemes advisedly, because I think there is a substantial
amount of evidence that there was manipulation of pricing in
the California marketplace. Was the division of Enron that you
headed involved in that? Were you an enabler? Were you aware of
what was going on? We want to ask a series of questions about
that.
In addition to that, of course, in recent days and weeks
issues have been raised about accounting treatment in
corporations. In some cases, accounting scams. We want to talk
to you about those issues as well, and we understand that your
compensation at the Enron Corporation was in some way attached
to California pricing policies, wholesale and retail prices
paid in California, and so we want to visit with you about
that.
Let me again say that I take no joy in calling people
before the Subcommittee, or full Committee. Nor do my
colleagues, but, in some corporations, there have been
bankruptcies and restatements, and people at the top have left
with a pocketful of gold while the investors and the employees
have lost their jobs or their life savings. On their behalf, we
have to ask tough questions.
On behalf of the people in California who were consumers of
electricity and who discovered dramatic run-ups in the price of
electricity and brownouts and blackouts in California, and
especially in light of what we have learned in previous
hearings, we have an obligation to ask tough questions. It's
for the whole West Coast, not just California--I have mentioned
California, but for Oregon and Washington, as well, we have an
obligation to ask tough questions. If there was price
manipulation, who was involved? Who is responsible? Who is
going to own up to it?
So, as a result of those hearings, Secretary White, we call
you before this Committee, and we appreciate your willingness
to testify.
Let me call on some of my colleagues for brief opening
comments, after which I will ask you to take an oath, and then
we will hear your statement. Let me call on the Ranking Member
of the full Committee, Senator McCain.
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
Senator McCain. Mr. Chairman, I have no opening statement.
Secretary White, perhaps I should save this for an Armed
Services Committee, but I see $38,000 here--the amount some 200
army personnel spent using Government charge cards to get lap-
dances and other forms of entertainment at strip clubs near
military bases. Now, would you agree that there has been abuse
after abuse after abuse on this credit card situation. I know
it is not the subject of this hearing, but that is not helpful
in gaining the American people's support for the American
military.
I thank you for appearing here today.
Secretary White. I agree, by the way.
Senator McCain. I want to know what you are doing about it.
I figured you might agree, and so I thank you. I thank the
Chairman, for holding the hearing.
Senator Dorgan. The Ranking Member of the Subcommittee,
Senator Fitzgerald.
STATEMENT OF HON. PETER G. FITZGERALD,
U.S. SENATOR FROM ILLINOIS
Senator Fitzgerald. I have no opening statement, Mr.
Chairman.
Senator Dorgan. Senator Wyden.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman. I appreciate your
conducting this inquiry. It has enormous impact on my
constituents, and I think what we are going to be looking at
today is whether we are dealing with a textbook case of an
Administration insider faced with serious allegations of
questionable conduct getting kid glove treatment, and I want to
be very specific about what I am concerned about.
There is substantial evidence that Mr. White misled
investors about the finances of Enron Energy Services, with his
former staff at the company tying him directly to deceptive
acts.
There is substantial evidence that, while Mr. White served
as Vice Chairman, his former company was directly involved in
Enron's trading schemes to manipulate West Coast energy
markets, which has been devastating to my constituents.
There is substantial evidence that, while serving in his
present capacity as a U.S. Government official, Mr. White has
used military jets for personal business, and what especially
troubles me is that I do not see any evidence to date that
these actions are being timely and thoroughly investigated by
this Administration's regulators.
For example, Enron Energy Services publicly reported
profits until Enron collapsed, but it now appears the company
lost money every quarter. Former Enron employees say Mr. White
helped mislead the analysts and investors about the performance
of Enron Energy Services, and then he personally approved the
use of aggressive accounting methods that made his company
appear profitable when it was not.
We need to find out whether the U.S. Securities and
Exchange Commission is investigating this thoroughly, and when,
if ever, they plan to act. Despite the evidence that the
company was extensively involved in Enron's trading activities,
Mr. White has been quoted in the paper as saying that EES, his
company, was not involved in manipulation of West Coast energy
markets, claiming that, quote, we were not privy to their
trading strategies.
The documents that have been obtained by the Attorney
General of my state and other western states show that Enron
Energy Service employees were present at meetings where Enron's
market manipulation strategies were discussed, and that they
received e-mails, both describing these strategies and
discussing how to respond to the regulator's subpoenas. I want
to know what the Federal Energy Regulatory Commission is doing
to examine this.
So there are other important issues we need to look at, Mr.
Chairman. Particularly, what I want to know is whether the
issues involving the Securities and Exchange Commission and the
Federal Energy Regulatory Commission are being examined
thoroughly and in a timely way. We have not seen any evidence
to date that that is the case, and given the amount of damage
these actions caused to my constituents, I want to get to the
bottom of this and hear from Mr. White.
Senator Dorgan. Senator Breaux.
STATEMENT OF HON. JOHN B. BREAUX,
U.S. SENATOR FROM LOUISIANA
Senator Breaux. I pass.
Senator Dorgan. Senator Boxer.
STATEMENT OF HON. BARBARA BOXER,
U.S. SENATOR FROM CALIFORNIA
Senator Boxer. I would ask my statement be placed in the
record.
Senator Dorgan. Without objection.
Senator Boxer. I would briefly say I want to echo what the
Chairman said about this not being a happy day for anybody, but
we have to have an interest in what happened and at Enron,
particularly the people on the West Coast, and I am interested
in knowing what EES--that is the Enron Energy Services, of
which you were Vice Chairman--what role they played in creating
the accounting scandals that led to Enron's downfall, the cost
to the State of California of billions of dollars in fraudulent
charges, the ruination of the financial security of thousands
of Enron employees and shareholders throughout the country, and
billions of dollars of losses to pensions throughout the
country.
I will ask when I have a chance what you knew about Enron
and EES's sham accounting practices and trading schemes. I will
ask what you knew about hiding obscene profits generated in
California in order to keep the truth from our constituents. I
will ask you about your sale of Enron's stock in escalating
amounts as you spoke to former Enron associates in this climate
today. The actions of high level executives must be looked at.
I am deeply concerned about the numbers of phone calls that
occurred after 9/11, after we were attacked, and after we were
actually--you had personnel in Afghanistan working 24/7, and
these escalating phone calls and sales of stock.
I will put the rest of my statement in the record. I am
very concerned about both the actions on the sale of the stock,
and also what EES did to my people in California.
[The prepared statement of Senator Boxer follows:]
Prepared Statement of Hon. Barbara Boxer, U.S. Senator from California
I want to thank you all for being here. I want to give you a
preview of my questioning of Army Secretary Thomas White on Thursday.
Thomas White joined Enron in 1990. He was Vice Chair of Enron
Energy Services or EES from 1998 to 2001. EES was an Enron retail
trader that entered into long-term energy contracts with California.
I will ask Secretary White what he knows about sham accounting
practices and trading schemes at Enron such as ``Get Shorty,'' ``Fat
Boy,'' and ``Ricochet.''
I will ask about Enron hiding obscene profits from California in
order to keep the truth from the public. I will ask him about the sale
of his Enron stock in escalating amounts as he spoke to Enron
associates. I will ask him about his personal involvement in pushing
Enron stock on its employees. Did Secretary White ever let those poor
Enron employees know when he was selling his stock and changing his
mind about the outlook of the company?
I have a chart (see Timeline in Appendix) showing Secretary White's
Enron stock sales and the phone calls and meetings he had during the
period of time that he unloaded 405,710 shares to the tune of $12.1
million. The chart shows a total of 74 phone conversations and 7
meetings with Enron associates.
Amazingly, six of White's seven meetings with Enron associates
occurred after we were attacked on September 11th. Remarkably, 54 calls
were made after Secretary White became the Pentagon's Homeland Security
Director. 50 calls were made after our military was placed in harm's
way in Afghanistan.
Now, I think it's fair to say that after 9/11, the leader of the
Army, the Secretary of the Army, is one of the most important people at
the Pentagon--perhaps in our nation. And add to that Pentagon Homeland
Security Coordinator.
I want to say that these calls and meetings should have taken place
with those responsible for protecting America's military abroad and
lives at home.
I find it remarkable that Secretary White would have had even a
moment to spare to chat with his former associates. What do you suppose
they spent all that time talking about? From the looks of this chart
it's pretty obvious. Martha Stewart made a few phone calls about a
stock and it set off a Congressional investigation in the House.
Her phone calls pale in comparison to the Secretary of the Army. If
on Thursday, Secretary White does not respond to these matters, I
believe that it is in the best interest of the nation that he resign.
Senator Dorgan. Senator Cleland.
STATEMENT OF HON. MAX CLELAND,
U.S. SENATOR FROM GEORGIA
Senator Cleland. Thank you very much, Mr. Chairman. Mr.
Secretary, welcome. Thank you very much for coming. I have to
note for the record that I am on the Armed Services Committee
and admire the fact that you were in the Army for 23 years, a
graduate of West Point in 1967, a Vietnam veteran, selected by
General Colin Powell when he was Chairman of the Joint Chiefs
of Staff as his Executive Assistant, and the first in your West
Point class to make General. That is an awesome record,
exemplifying duty, honor, country.
Then the story turns. In 1990, Enron offered you a multi-
million dollar salary, got you involved in the power business,
and you were at Enron for 11 years. Enron has now become the
poster boy for what Alan Greenspan calls infectious greed, the
opposite of duty, honor, country, and I would like to know, and
through the questions I have later on, how in the world that
you could reconcile a great career in the United States Army
that is exemplary with 11 years at Enron that wound up to be
actually something that we all wish we had never heard of.
Thank you very much, Mr. Chairman.
Senator Dorgan. Senator Carnahan.
STATEMENT OF HON. JEAN CARNAHAN,
U.S. SENATOR FROM MISSOURI
Senator Carnahan. Thank you, Mr. Chairman. Over the course
of the last few months, this Committee has worked very hard to
uncover the roots of the California energy crisis. Only by
fully understanding the circumstances that led to skyrocketing
prices and rolling blackouts can we be assured that Americans
will never have to face that again.
Secretary White's testimony is essential to our full
understanding of the energy crisis and the role that Enron
played. Secretary White, in your capacity as Vice Chairman of
Enron's Energy Services, you were familiar with both the energy
trading strategies used by Enron and the aggressive accounting
practices used to inflate the profits of EES. The results of
those strategies and practices are shocking. The manipulation
of energy markets contributed to a devastating energy crisis
for Americans living on the West Coast.
Dubious accounting contributed to the spectacular collapse
of what was supposedly one of America's largest corporations.
Thousands of employees lost their jobs, and many of them lost
their savings. We want to know what role you played in this
meltdown. When Senator Gramm introduced you to the Senate Armed
Services Committee during your confirmation hearing last year,
he lauded you as, ``one of the most outstanding managers in
corporate America.'' In accordance with that representation you
were confirmed to serve as Secretary of the Army.
The Enron documents which have come to light since your
confirmation reveal that Enron Energy Services, which you
managed, was artificially inflating its demand for power. This
practice enriched Enron, but it devastated consumers. The
aggressive accounting practices used by EES made that unit
appear more profitable than it really was, which, of course,
was a chronic problem at Enron. I hope you will share with us
your explanation of these troubling revelations. I look forward
to hearing from you.
Senator Dorgan. Senator Nelson.
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Thank you, Mr. Chairman. Mr. Chairman, I
would like the Hon. Secretary just in the course of his
conversation and in the course of his testimony if he will
share with us basically within a 5-month period $12 million
worth of stock was sold, starting in June, June 13, proceeds of
over $8 million, a sale then in September of $848,000, and then
a sale in October of $3 million worth, while at the same time
conversations were occurring with Enron executives on the
telephone, and while meetings were occurring with Enron
executives during this same 5-month time frame. And, so, I am
looking forward to hearing your testimony.
Thank you.
Senator Dorgan. Senator Nelson, thank you.
Mr. Secretary, by custom in these hearings we have had
witnesses testify under oath, and we would like you to take the
oath. Do you swear to tell the truth, the whole truth, and
nothing but the truth, so help you God?
Secretary White. I do.
Senator Dorgan. Mr. Secretary, why don't you proceed.
STATEMENT OF HON. THOMAS E. WHITE,
SECRETARY OF THE ARMY
Secretary White. Thank you, Mr. Chairman. My name is Tom
White, and I am appearing here voluntarily to answer the
questions the Committee may have with respect to its
investigation regarding the California energy marketplace in
2000 and 2001.
Since May 2001 I have been privileged to serve as the
Secretary of the Army. From July 1990 until that date, I was
employed by Enron Corporation. For several years I ran various
businesses that involved physical assets, including gas
pipelines and power stations. Beginning in April 1998, I
brought that experience to a startup retail energy business
called Enron Energy Services, or EES, where I was assigned the
duties of Vice Chairman, a job I held until February 2001.
Enron was divided into a number of business units which
changed from time to time as energy markets evolved over the
years. With respect to the California energy market in 2000 and
2001, it is important to understand that the energy services
business I ran was entirely separate from the wholesale
business run by Enron Wholesale Services. EES was strictly a
retail energy operation of national and international scope
that sold commodity capital and energy services to the end
users of energy. Those products included both gas and
electricity, were both short and long term, and were sold to
small and large customers located throughout the United States
and the U.K.
To give you a feel for the scope of EES' operation, when I
departed it had somewhere in the neighborhood of 4,000 people
in its Energy Service Division operation alone. They included
customer account representatives, call center operators,
metering and billing specialists, mechanical and electrical
subcontractors, energy efficiency design engineers, and
facility managers.
EES had in place the structure and the organization on a
nationwide basis to deliver its diverse energy product. My day-
to-day duties included overseeing these service delivery
organizations. The common thread in all the retail energy
products sold was the lowering of total energy cost to our
customers. EES achieved this by buying energy at better prices
than could be achieved by our customers, and reducing the
energy consumption of its customers through the application of
engineering and operations expertise.
Enron Wholesale Services was a much larger operation than
EES. Although, among other things, it had a huge trading
operation which facilitated its sale of energy at the wholesale
level, EES in concept or in contrast was a buyer of energy and
was a participant in California's power market because it had
retail customers. It had retail load, if you will, that it was
contractually obligated to serve. EES' interest was to serve
that load at the lowest possible cost and to reduce the need
for electricity in the first place through demand reduction
measures. As a retail seller of electricity, it was always in
EES' interest to purchase the electrons EES was required to
deliver to its customers at the lowest possible price.
EES shopped in the market for the best possible price,
which in many cases was provided by a third party and not an
Enron wholesale energy affiliate. In this regard, the interests
of EES were entirely different from those of Enron Wholesale
Services. It always operated on a strictly arm's length basis
with Enron Wholesale. That reflected its different business
interests. I was never aware of or read the memos on alleged
power trading strategies at the Wholesale Services that have
been discussed in previous hearings held by this Committee
until copies of those memos were sent to me when they were made
public by the FERC several months ago.
I never worked for Wholesale Services. I was never involved
in its trading operations, and so I cannot testify with respect
to how these operations were conducted. I can categorically
say, however, that it was not ever in the interest of EES to
see wholesale energy prices escalate.
While I was employed in the private sector, I carried out
my responsibilities in an entirely ethical manner, just as I
did over the 28 years that I have served my country in the
United States Army. I decided to return to the Government as
Army Secretary with the sole goal of helping the Army and
making it a better place for soldiers and their families. Since
last May, I have done everything possible to advance the
interest of the country and the Army I love. I am proud of what
has been accomplished since then by courageous, dedicated men
and women who served to protect our great nation. It has been
an honor to be involved in their efforts.
Mr. Chairman, that concludes my statement. I would be
pleased to answer any questions the Committee may have.
[The prepared statement and timeline of Secretary White
follow:]
Prepared Statement of Hon. Thomas E. White,
Secretary of the Army
My name is Thomas E. White. I am appearing here voluntarily to
answer questions the Committee may have with respect to its
investigation regarding the California energy marketplace in 2000 and
2001.
Since May 2001, I have been privileged to serve as Secretary of the
Army. From July 1990 until that date, I was employed by Enron
Corporation. For many years, I ran various businesses that involved
physical assets including gas pipelines and power stations. Beginning
in April 1998, I brought that experience to a start-up retail energy
business called Enron Energy Services, or EES, where I was assigned the
duties of Vice Chairman until February 2001.
Enron was divided into a number of business units which changed as
energy markets evolved over the years. With respect to the California
energy market in 2000 and 2001, it is important to understand that the
Energy Services was always entirely separate from the wholesale
business run by Enron Wholesale Services. EES was strictly a retail
energy operation of national and international scope that sold
commodity, capital and energy services to end users of energy. Those
products included both gas and electricity, were both short and long-
term, and were sold to small and large customers located throughout the
United States and the UK. To give you a feel for the scope of EES'
operation, when I departed, it had somewhere in the neighborhood of
4,000 people in its energy service delivery operation alone. They
included customer account representatives, call center operators,
metering and billing specialists, mechanical and electrical
subcontractors, energy efficiency design engineers and facility
managers. EES had in place the structure and organization on a
nationwide basis to deliver its diverse energy product. My day-to-day
duties included overseeing this service delivery organization.
The common thread in all the retail energy products sold was the
lowering of total energy costs to our customers. EES achieved this by
buying energy at better prices than could be achieved by our customers,
and by reducing the energy consumption of its customers through the
application of engineering and operations expertise.
Enron Wholesale Services was a much larger operation than EES.
Among other things, it had a huge trading operation which facilitated
its sale of energy at the wholesale level. EES was a buyer of energy
and was a participant in California's power market because it had
retail customers, retail load, if you will, that it was contractually
obligated to serve. EES' interest was to serve that load at the lowest
possible cost and to reduce the need for the electricity through demand
reduction measures. As a retail seller of electricity, it was always in
EES' interest to purchase the electrons EES was required to deliver to
its customers at the lowest possible price. EES shopped in the market
for the best possible price, which in many cases was provided by a
third party and not an Enron wholesale energy affiliate. In this
regard, the interests of EES were entirely different from those of
Enron Wholesale Services; it always operated on a strictly arms-length
basis with Enron Wholesale that reflected its different business
interests.
I was never aware of or read the memos on alleged trading
strategies at Wholesale Services that have been discussed in previous
hearings held by this Committee until copies of these memos were sent
to me when they were made public by the FERC several months ago. I
never worked for Wholesale Services and I was never involved in its
trading operations, and so I cannot testify with respect to how those
operations were conducted. I can say categorically that it was not ever
in the interest of EES to see wholesale energy prices escalate.
While I was employed in the private sector, I carried out my
responsibilities in an entirely ethical manner, just as I did over the
28 years that I served my country in the Army. I decided to return to
the government as Army Secretary with the sole goal of attempting to
help the Army and to make it a better place for soldiers and their
families. Since last May I have done everything possible to advance the
interests of the Country and the Army I love, and I am proud of what
has been accomplished since then by the courageous, dedicated men and
women who serve to protect this great nation. It has been an honor to
be involved in their effort.
Mr. Chairman, that concludes my statement. I would be pleased to
answer any questions.
______
Timeline
May 4, 2001
White writes to Army General Counsel saying he will divest all Enron
stock, options and other Enron-related holdings within 90 days of
his appointment.
May 24, 2001
White is appointed Secretary of the Army.
June 7, 2001
White talks with David Haug, Chairman of Enron Global.
June 13, 2001
White sells 92,000 shares of Enron stock for $4.63 million.
June 15, 2001
White sells 42,338 shares of Enron stock for $2.06 million.
June 19, 2001
White sells 10,000 shares of Enron stock for $446,990.
June 20, 2001
White talks with Jack Urquhart, member of Enron Board of Directors.
June 22, 2001
White sells 25,000 shares of Enron stock for $1.1 million.
White talks with Christie Patrick, Enron VP for Public Affairs.
June 28, 2001
White talks with David Haug, Chairman of Enron Global.
August 6, 2001
White talks with Chris Holmes, Enron VP, and Robert Hurt, Enron Energy
Services (EES) executive.
August 8, 2001
White talks with Robert Hurt, Enron Energy Services (EES) executive,
and Stan Horton, Enron Gas Pipeline President.
August 9, 2001
White requests a 125-day extension from the Office of Government Ethics
(OGE) until January 1, 2002 to complete the divestiture.
August 13, 2001
The Senate Armed Services Committee grants White a 90-day extension to
complete his divestiture.
August 14, 2001
White talks with Christie Patrick and Chris Holmes.
Jeffrey Skilling resigns as CEO of Enron.
August 16, 2001
White talks with Joe Sutton, Enron Vice Chairman.
August 17, 2001
White talks with Chris Holmes.
August 20, 2001
White talks twice with Rosalee Fleming, Enron executive.
August 22, 2001
White talks with Marty Sunde, EES Vice Chairman.
August 23, 2001
OGE grants White a 90-day extension until November 20, 2001.
September 3, 2001
White talks with Joe Sutton.
September 7, 2001
White sells 23,000 shares of Enron stock for $713,000.
September 9, 2001
White talks with Jude Rolfes, Enron VP.
September 10, 2001
White talks with Ken Lay, Enron Chairman.
White meets with David Haug.
September 17, 2001
White talks with Chris Holmes.
September 24, 2001
White sells 5,000 shares of Enron stock for $135,500.
White meets with Christie Patrick.
October 2, 2001
White talks with Rex Rogers (affiliation unknown at this time).
October 4, 2002
White meets with Greg Whalley, Enron President.
October 8, 2001
White talks with Robert Hurt.
October 11, 2001
White talks with Ed Giblin (affiliation unknown at this time).
October 17, 2001
White talks with Jude Rolfes.
October 21, 2001
White talks with Stan Horton.
October 22, 2001
White talks with Stan Horton and attempts to reach Ken Lay by
telephone. Lay returns the call, but the two do not connect.
Enron acknowledges SEC inquiry into off-balance sheet partnerships.
October 23, 2001
White asks OGE for an additional 90-day extension beginning on November
20, 2001. OGE does not act on his request.
October 24, 2001
White sells 43,000 shares of Enron stock for $692,300.
White sells 60,000 shares of indirectly owned Enron stock (CSFB Family
Partnership) for $969,000.
White sells 18,663 shares of indirectly owned Enron stock (CSFB
Personal) for $301,000.
White talks with John Duncan, member of Enron Board of Directors.
Andrew Fastow steps down as CFO of Enron.
October 26, 2001
White meets with Chris Holmes.
October 29, 2001
White meets with John Carr, EES executive.
October 30, 2001
White sells 86,709 shares of Enron stock for $1.11 million.
White talks with Jude Rolfes.
White talks with Robert Hurt.
October 31, 2001
White talks with Robert Hurt.
Enron announces that the SEC inquiry has been upgraded to a formal
investigation. Enron announces formation of the Powers Commission
to conduct an independent investigation.
November 1, 2001
White talks with Norm Blake, member of Enron Board of Directors, and
with Cliff Baxter, Enron North America Chairman.
November 4, 2001
White talks with Stan Horton.
November 5, 2001
White talks with Stan Horton and tries unsuccessfully to reach David
Haug.
November 6, 2001
White talks with Stan Horton, and tries unsuccessfully to reach Horton
a second time that day.
White tries unsuccessfully to reach David Haug.
November 7, 2001
White talks twice with Robert Hurt and once with Jude Rolfes. He tries
unsuccessfully to reach Stan Horton.
November 8, 2001
White talks with Stan Horton.
Enron announces that it is revising its financial statements to account
for $586 million in losses.
November 13, 2001
White talks with Jude Rolfes.
November 20, 2001
White talks with Chris Holmes.
November 21, 2001
White talks with Robert Hurt.
November 26, 2001
White talks with Jude Rolfes and Stan Horton and tries unsuccessfully
to reach Robert Hurt.
November 28, 2001
White talks with Jude Rolfes, Chris Holmes and Stan Horton. He talks
twice with Robert Hurt.
Dynegy backs out of merger deal with Enron.
November 29, 2001
White tries unsuccessfully to reach Robert Hurt, and speaks with him
later in the day.
December 2, 2001
Enron files for bankruptcy.
December 3, 2001
White talks twice with Jude Rolfes and once with Robert Hurt.
December 4, 2001
White tries unsuccessfully to reach Robert Hurt.
December 5, 2001
White tries unsuccessfully to reach Robert Hurt.
December 8, 2001
White talks with Robert Hurt.
December 10, 2001
White talks with Robert Hurt and Stan Horton.
December 16, 2001
White tries unsuccessfully to reach Robert Hurt.
December 19, 2001
White talks with Robert Hurt.
January 10, 2002
White talks with Robert Hurt and Dan Leff (affiliation unknown at this
time). White meets with Chris Holmes.
January 16, 2002
White talks with Joe Sutton.
White meets with Stan Horton.
January 17, 2002
White disavows his options to buy 665,342 shares of Enron stock. White
also requests another extension from OGE; there is no indication
that OGE acted on his request.
January 24, 2002
White talks with Stan Horton.
January 25, 2002
Cliff Baxter commits suicide.
January 26, 2002
White talks with Robert Hurt.
January 27, 2002
White talks with Robert Hurt.
January 30, 2002
White talks with Robert Hurt, Dan Leff, Jude Rolfes and Marte Sunde.
February 2, 2002
White talks with Robert Hurt.
Senator Dorgan. Mr. Secretary, let me begin by asking some
questions about the pricing in the California marketplace. Are
you familiar with a Steve Barth, former Vice President of EES?
Secretary White. Yes.
Senator Dorgan. Let me read you what Steve Barth said. He
said, ``Thomas White told us that the California electricity
crisis was our chance to turn EES into a profitable unit of
Enron.'' He said the energy crisis in California would put EES
on the map. Is that an accurate statement?
Secretary White. Well, I hope it would be, because our
purpose in the California energy market was to lower prices for
consumers and for our customers, and so risk management of
commodity price exposure was a principal part of our product
offering, and the more volatility in energy markets you get,
the more important that risk management is.
Senator Dorgan. Now, Secretary White, the FERC document I
have in my hand says that EES, which is your sister
organization from which you purchased power----
Secretary White. EPMI, or EES?
Senator Dorgan. I am sorry. EPMI had some of the highest
rates in the industry, and you purchased a substantial quantity
of their power, did you not?
Secretary White. We only purchased power from EPMI if it
was the most competitively priced in the market. We shopped for
power to sources other than EPMI when we didn't like the
pricing we got from them.
Senator Dorgan. But what the FERC document shows is that
you were actually EPMI's largest customer.
Secretary White. Well, that's perhaps true, if they had the
best pricing.
Senator Dorgan. But the FERC documents also show EPMI had
the highest prices.
Secretary White. That may not have been true 100 percent of
the time. My point is that we were not interested in finding
the most costly power in the market because we couldn't pass
the price of that on to our customers, who had signed up
commodity deals with us in California, where their price
exposure was transferred to us, so it wasn't in our commercial
interest to escalate the price of power or buy the most
expensive power in the market.
Senator Dorgan. Except, Secretary White, the documents at
FERC suggest you did just that. They suggest that EPMI, which
was a sister organization in your corporate shell, was selling
the highest cost power, and you were, in fact, the biggest
customer buying the highest cost power in the market.
Secretary White. I don't think that's the case, and
further, let me--
Senator Dorgan. I have the FERC documents that say that is
the case.
Secretary White. Let me explain very clearly what our
relationship was with EPMI. For the commodity component, the
energy component of our offering, we sought in the competitive
California market the cheapest price for that component we
could find. Once we had established who we were going to buy
that commodity from, the scheduling of that flow of that
commodity and all the details with the ISO, the state's
independent system operator, was handled through EPMI for a
fixed rate on a commercially arm's length basis. In other
words, they sleeved the transaction for us of the commodity
that we purchased.
Senator Dorgan. Mr. Secretary, let me read you a couple of
things that will tell you why I ask these questions. A series
of traders were interviewed, those who were trading power, and
here is what they said. They said, Enron held the transmission
rights on Path 26, which is the path between Northern and
Southern California, a key transmission line connecting
Northern to Central California, and also connecting to Path 15,
a major bottleneck grid.
About a dozen traders have been interviewed. They said they
began manipulating California's power grid beginning in
February 2000, continuing until the spring of 2001. These are
Enron traders. The practices engaged in resulted in two days of
rolling blackouts.
Secretary White. Are they wholesale traders?
Senator Dorgan. Yes, but I want to get to the point of how
the retail side enabled this to happen, according to the
traders. They said, ``What we did was overbook the line we had
the rights on during a shortage or in a heat wave. We did this
in June 2000, when the Bay Area was going through a heat wave,
and the ISO could not send power to the north.''
``ISO has to pay Enron to free up the line in order to send
power to San Francisco to keep the lights on, but by the time
they agreed to pay us, rolling blackouts had already hit
California and the price of electricity went through the roof.
The skyrocketing power prices then enabled Enron Energy
Services to go out and sign the contracts with businesses who
feared they would be hit again with expensive electricity
bills.'' Again this is Steve Barth, former EES executive.
He said, ``This was like the perfect storm. First our
traders were able to buy power for $250 in California, sell it
to Arizona for $1,200, then resell it to California for five
times that amount, and then EES'' (the organization you ran)
``were able to go in to large companies and say, well, sign a
10-year contract with us and we will save you millions.'' This
is different hands of the same company setting up businesses:
you go in and you sign them to a 10-year contract for mark-to-
market and claim immediately income which you have never
received, for power which you have not yet sold.
Tell me what is wrong with that.
Secretary White. Well, there are several things wrong with
that. The first thing wrong with it is, the traders in their
scheduling at wholesale level were never under our control in
the retail business. We dealt with them on an arm's length
basis.
Second, we already had a bunch of contracts in place that
owed commodity to retail customers in the State of California.
The escalation of prices in the market would hurt us
economically, EES, in satisfying the contracts we already had
in place with those customers.
The trading strategies employed by the wholesale business
as outlined in the trading memos were not internal to EES. We
had nothing to say about them, and I was not aware of those
trading strategies as we ran our business in California.
Senator Dorgan. Is it not the case that EES and EPMI sat at
the same trading desk every day?
Secretary White. We had--our traders were in Houston.
EPMI's West Coast operation I believe was in Portland.
Senator Dorgan. And you did not have traders on the West
Coast?
Secretary White. No, not to my knowledge. Our commodity
trading operation was based in Houston. EPMI's trading
operation, as I understand it, was based in Portland.
Senator Dorgan. Mr. Secretary, one of the things that
appears to me to represent, as Mr. Barth says, the perfect
storm here--an ability of a company with several different
tentacles to be able to jointly create a system of dramatically
increasing prices--was a situation in which the wholesale
pricing developed schemes and strategies that were working
very, very well, so that the wholesale side of Enron was making
a fortune. Would you agree that the wholesale side was
extraordinarily profitable during this time?
Secretary White. Well, if you just read the annual report
of 2000, the wholesale business in total, I have no idea how
much of it came out of California. They were a global
operation, but I think they made over $2 billion pretax. In the
retail business we were very small. I think our net income was
more like, or our pretax income was more like $160 million, and
so we were a very small business.
Senator Dorgan. I will get to yours in a moment, but is it
not the case the wholesale side was extraordinarily profitable
as a result of the pricing strategies in California during the
crisis?
Secretary White. I don't know that to be the case.
Senator Dorgan. The answer is yes. You know that.
Secretary White. If it is, you ought to get someone from
the Wholesale Group in here to tell you that who ran the
business.
Senator Dorgan. Well, maybe we will do that. I will suggest
to them that you invited them, and perhaps we will do that. In
the meantime, you know that the wholesale side was making a
fortune at a time when the California crisis was ratcheting up
prices, and my point is this: the retail side was losing money.
In fact, if you knock out the gimmicky accounting, the retail
side never made a penny.
Secretary White. What are you talking about, the gimmick of
accounting.
Senator Dorgan. I am talking about the mark-to-market
accounting in which you were claiming revenues that you did not
have for power that had never been delivered.
Secretary White. Well, let's talk about mark-to-market
accounting right now, then. Mark-to-market accounting for
future energy contract was the standard established by the FASB
for the accounting of those types of contracts. It was standard
throughout the industry. It was standard throughout Enron as a
member of the industry. It was fully disclosed as the style of
accounting associated with this. We didn't have the option in
the retail business to account for long-term energy contracts
on an accrual basis.
Senator Dorgan. Did you have the option when you mark-to-
market of making decisions about whether states would be
deregulated in the future and therefore decrease energy prices,
which allowed you to mark the profits on your books? Is it not
the case that that assumption you made is what created the
profits, otherwise you did not have profits?
Secretary White. We did not control the forward pricing
curves in retail that--against which our deals were priced.
Senator Dorgan. Mr. Secretary, we will talk about that some
more, but the fact is, you did have that capability, because
there were certain assumptions in which you made that mark that
allowed you to create income that did not exist.
Secretary White. Well, the question of whether it didn't
exist is a different question, but any mark-to-market process
includes assumptions and includes those things that go into
establishing the forward pricing curve. That is why, when a
company uses mark-to-market accounting, it is fully disclosed
in the financial reporting of the company.
Senator Dorgan. One last question, and we will have several
rounds, but you know, we have had people sitting at that table
who lost their life's fortunes. We have had people who were
investors in Enron that lost everything. We have had employees
who lost their jobs. How much money did you make working for
Enron?
Secretary White. I couldn't tell you. I'd have to provide
it for the record.
Senator Dorgan. Is it over $10 million?
Secretary White. Yes.
Senator Dorgan. Over 20?
Secretary White. I don't know.
Senator Dorgan. Over 30?
Secretary White. I would have to add it up.
Senator Dorgan. We will add it up for you.
But my point is this. There is a lot that happened inside
the Enron Corporation that raises a great many questions. I
have not yet, I guess, gotten to the bottom of whether the
ability of the retail side to enable the wholesale side to
ratchet up power cost, put enormous profits on the books on the
wholesale side, and show losses on the retail side has
benefited the entire corporation. I do not think we have gotten
to finality on that point. I will come back to that.
Secretary White. Can I respond to that?
Senator Dorgan. Yes, of course.
Secretary White. Just one minute. The size of retail
relative to wholesale, with us being a very small business and
them being enormous, the largest wholesale energy marketer in
the country both in gas and electricity by an order of
magnitude, would seem to suggest to me that their ability to
make enormous amounts of money leveraged off our very small
position would not hold up to scrutiny. We were a very small
startup business compared to the magnitude and scale of the
wholesale activity.
Senator Dorgan. Well, I would just observe that FERC has
provided us information that suggests you were the largest
purchaser from your sister organization, EPMI. The way it looks
to me is that one hand could not work unless the other hand was
clasping it, but I will ask more about that.
Senator McCain.
Secretary White. And by the way, I would--because the West
Coast market has now been examined for two years, since the
event, I look forward as much as anyone else to the completion
of the investigation by the FERC experts in this matter----
Senator Dorgan. Mr. Secretary----
Secretary White.--to see what it is they conclude.
Senator Dorgan. Mr. Secretary, as you know, FERC did its
best imitation of a potted plant for two years while
Californians were cheated and defrauded in my judgment; this is
not petty theft, it is billions of dollars--billions of dollars
that were taken from the California customers. Enron was
involved and some other companies as well, but the evidence at
Enron, it seems to me, suggests that a substantial amount of
activity was going on that enabled that to happen. That is what
we are inquiring about today.
Senator McCain.
Senator McCain. Mr. Secretary, absent from your statement
was any sentiment about what has happened to the workers, the
shareholders and the retirees who have been afflicted by this
terrible scandal that has shaken the confidence of every
American. Do you have any comments about them?
Secretary White. Yes. I think it's a tremendous tragedy to
a wide range of stakeholders, as you would suggest. Every
employee of Enron was also a shareholder and in many cases an
optionholder, so starting with the employees of Enron that have
been damaged by this, many of whom are personal friends of
mine, many of whom I worked with over those 11 years, I think
it is an absolutely terrible tragedy that has occurred, and I
fully support the actions by the agencies that the Chairman
talked about to get to the bottom of it and hold people
accountable that were responsible for it.
Senator McCain. Thank you, Secretary White. No further
questions.
Senator Dorgan. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. The point for me,
Secretary White, is the government Executive Branch agencies
are investigating Enron's activities. The question for me is
whether they are looking at your role as a senior executive,
and I want to ask you first whether the Federal Energy
Regulatory Commission has contacted you about Enron Energy
Services' activities in West Coast markets, including any
transactions between your former company and Enron Power
Marketing or any other entity?
Secretary White. No.
Senator Wyden. They have not indicated that they are
looking at any of your work as a senior executive?
Secretary White. Me personally?
Senator Wyden. Yes.
Secretary White. No. I've had no contact with the FERC.
Senator Wyden. Has the Securities and Exchange Commission
contacted you about Enron Energy Services' accounting methods,
or your former company's reported profits?
Secretary White. No.
Senator Wyden. Has the Securities and Exchange Commission
contacted you about connections between your contacts with
Enron executives and your sales of Enron stock?
Secretary White. No.
Senator Wyden. Did anyone at the Defense Department or the
White House ever contact you about your commitments or ethical
obligations to sell Enron stock following your confirmation as
Secretary of the Army?
Secretary White. I've had constant discussions with not
only the ethics officer inside the Department of the Army, but
also DOD's General Counsel, as I think all political appointees
have in the execution over the months of their ethics
agreements, so there has been a lot of discussion, as well as
with the Office of Government Ethics.
Senator Wyden. Could you describe further those discussions
and what issues were addressed?
Secretary White. Well, the discussions flowed naturally
from the ethics agreement that I signed, which had in it
divestiture requirements for assets, some of which was Enron
stock that had to be divested, and we have had, as I went about
complying with the ethics agreement, the dialog that you would
expect as I moved to completion of the agreement.
Senator Wyden. Has the Defense Department Inspector General
ever asked you to answer questions or to provide information
about your use of military aircraft for trips to Colorado in
March, and to Florida in February, where it appears you were on
personal business?
Secretary White. The Department of Defense Inspector
General has an ongoing investigation of the use of military air
by service secretaries, not just me but the other secretaries
as well, and that investigation is ongoing, and when it is
completed I'm sure the results will be presented to the
Secretary of Defense, and he will take appropriate action.
Senator Wyden. Now, let me turn to your statement. You say
in your statement this morning that you were never aware of the
Enron memos describing trading strategies. Were you aware that
employees of your company, Enron Energy Services, participated
in meetings with the lawyers who wrote these memos at which
trading strategies were discussed?
Secretary White. No.
Senator Wyden. Now, this was in the fall of 2000, before
the memos were written. Your employees also received e-mails on
how Enron should respond to subpoenas seeking information about
Enron trading strategies. My question is, why did you have your
employees participate in meetings about Enron trading
strategies and be part of the litigation team for responding to
subpoenas if your company on your watch had no involvement in
the trading strategies?
Secretary White. The litigation that flowed from the power
situation on the West Coast in 2000 and 2001, the General
Counsel and other attorneys of Enron Energy Services
participated in corporate discussions of the legal strategy of
how to respond to the subpoenas coming from various entities.
From that perspective, the two specific power memos that were
released by the FERC and referenced, I was not aware of when it
was done, nor was I aware that we had anyone at the meetings
during which these memos which describe wholesale trading
strategies were created.
Senator Wyden. Did Jeff Dasovich, Sue Mara or Mona
Petrochko work for Enron Energy Services?
Secretary White. Not to my knowledge. They could have. We
had a big organization. I am not familiar with either person.
Senator Wyden. Well, these are again documents that we have
received from the various state Attorneys General indicating
that they were employees of EES. So you were not aware that Mr.
Dasovich participated in any of the trading strategies, such as
Death Star or Fat Boy or others in detail?
Secretary White. No.
Senator Wyden. Mr. Chairman, for purposes of this round I
am going to stop here, but I will say that I find it remarkable
that the Federal Energy Regulatory Commission and the
Securities and Exchange Commission, in particular, are not
looking at the role of Mr. White in these matters. Certainly
the evidence that is on the record to date suggests that, at a
minimum, to have a thorough and timely Executive Branch
inquiry, the Securities and Exchange Commission and the Federal
Energy Regulatory Commission should not be looking just at
Enron, but they also should be looking at the role of Mr. White
as a senior official.
I said at the outset that what I am concerned about here is
whether there is a textbook case of an Administration insider
receiving kid glove treatment, and if the Securities and
Exchange Commission and the Federal Energy Regulatory
Commission are not in contact with Mr. White, for the life of
me I cannot figure out why those two agencies in particular are
not looking at his role in these matters, and I look forward to
the next round.
Senator Dorgan. Senator Smith, you were not here when we
did opening statements. Do you have a statement?
STATEMENT OF HON. GORDON SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Yes, Mr. Chairman, if I may. I would just
include it in the record.
Senator Dorgan. Without objection.
[The prepared statement of Senator Smith follows:]
Prepared Statement of Hon. Gordon Smith,
U.S. Senator from Oregon
Mr. Chairman, thank you for holding this hearing today on the
perspective of improving corporate responsibility. So many investors in
this country have lost hope. They have lost hope that honesty and
integrity guide the businesses of America. A sad state of affairs has
led us to create a system of increased checks and regulation. I am
committed to preventing further corruption and dishonesty from entering
into corporate America. I am proud of the legislation passed
unanimously by the Senate last week, S. 2673, the Public Company
Accounting Reform and Investor Protection Act of 2002, and I will
continue to fight for needed reform.
In the weeks before this bill was passed, I proposed an Investors'
Bill of Rights. I worked with colleagues on both sides of the aisle to
come up with bipartisan goals to prevent corporate abuse and protect
investors. I feel that there are changes that investors should be able
to count on coming out of the United States Congress. Many changes will
be made as a result of this bill. . . and in other areas we may have to
work further.
I believe that investors must have access to information about a
company. We should ensure that every investor has access to clear and
understandable information needed to judge a firm's financial
performance, condition and risks. The SEC will have the power to make
sure companies provide investors a true and fair picture of themselves.
A company should disclose information in its control that a reasonable
investor would find necessary to assess the company's value, without
compromising competitive secrets.
I believe that investors should be able to trust the auditors.
Investors rely on strong, fair and transparent auditory procedures and
the concept of the Oversight Board in the Sarbanes bill is a sound one.
I believe investors should be able to trust corporate CEOs. Unlike
shareholders or even directors, corporate officers work full-time to
promote and protect the well-being of the firm. A CEO bears
responsibility for informing the firm's shareholders of its financial
health. I support the concept of withholding CEO bonuses and other
incentive-based forms of compensation in cases of illegal and unethical
accounting . . . further I do believe that CEOs must vouch for the
veracity of public disclosures including financial statements.
I believe that investors should be able to trust stock analysts.
Investors should be able to trust that recommendations made by analysts
are not biased by promises of profit dependent on ratings. It is only
common sense that there should be rules of conduct for stock analysts
and that there must be disclosure requirements that might illuminate
conflicts of interest.
Finally I believe that we should be able to rely on the Securities
and Exchange Commission to protect investors and maintain the integrity
of the securities market. Current funding is inadequate and should be
increased to allow for greater oversight--ensuring investors' trust in
good government.
During the debate on this bill my attention has been called to the
plight of public pension systems, such as Oregon's Public Employment
Retirement System--known by the acronym PERS. PERS was invested in both
Enron and WorldCom stock and has been hit hard by the debacles that
occurred in each company. The PERS system lost about $46 million after
Enron self-destructed and another $63 million following the WorldCom
scandal.
These losses occurred because false profits were inflated and
corporate books were doctored. Under the PERS system, an 8 percent rate
of return is guaranteed for the 290,000 Oregon active and retired
members of PERS. Oregon taxpayers have to make up the difference
following an Enron debacle or WorldCom scandal--and my state's budget
is not prepared for this kind of loss.
Further, I am interested in finding out if there is more we can do.
I am asking the General Accounting Office, in consultation with the
Securities and Exchange Commission and the Department of Labor, to
report to Congress on the extent to which Federal securities laws have
led to declines in the value of stock in publicly traded companies and
in public and private pension plans.
I believe that a study of this nature is necessary because many
public and private pension plans continue to rely on the continued
stock growth in publicly traded companies--much like the PERS system. I
believe that such a study would provide the needed information so
public and private pension plans can reevaluate future investments in
publicly traded companies.
We cannot stand by and watch our hard working Americans' pension
systems ruined while corrupt corporate executives take advantage of
investors. I am proud of the work the Senate has done in the last week
in creating accountability and responsibility in corporate America and
look forward to working on this issue in a way that will help the
investors and pensioners in the PERS system in Oregon.
Thank you Mr. Chairman.
Senator Smith. Perhaps I will just ask a couple of
questions. Secretary White, you have had a tough time in this
job, and I think sometimes we do not say thank you for the
public service you give, but I know you make a lot less in this
job than you did in your former. Is that a fair statement?
Secretary White. Yes, sir, it is.
Senator Smith. I was concerned, however, when I read
recently, I believe it was on a television show, that it was
rumored you were going to take the Fifth Amendment today. You
clearly are not taking the Fifth Amendment today. Did you
seriously consider taking the Fifth Amendment?
Secretary White. No, I did not.
Senator Smith. Who began that rumor, then?
Secretary White. I would presume the same press that
published it.
Senator Smith. When you went through your confirmation
hearing, did you provide all the information that is now being
requested of you? Are there new things to be learned of you now
that we did not learn when you were confirmed as Secretary of
the Army?
Secretary White. I don't believe so. I think that I made
full disclosure as required. It was reviewed by the Senate
Armed Services Committee in some detail, as well as the Office
of Government Ethics and others responsible for that, and based
upon that information I was confirmed.
Senator Smith. Thank you, Mr. Chairman, and I commend you,
Secretary White, for not taking the Fifth Amendment. I
personally would find it very distressing if anyone in the Bush
administration ever took the Fifth Amendment before a committee
of this Congress.
Secretary White. So would I.
Senator Dorgan. I should say to the Senator from Oregon
that there was never an indication that Secretary White would
not be here, and there was never an indication that he would
assert Fifth Amendment rights. We were always informed that
when we invited him to testify, that he would be here to
testify.
Secretary White. Yes, sir.
Senator Dorgan. Senator Boxer.
Senator Boxer. You can go to Max first.
Senator Dorgan. Senator Cleland.
Senator Cleland. Thank you very much.
Mr. Secretary, the first comment I had when we had Ken Lay
here, my first observation about the Enron ethics and behavior
of top leadership at Enron was just a recall of something that
I learned when I was in the military, especially in Vietnam, is
that in combat officers eat last. Have you ever heard that
phrase? Are you familiar with that?
Secretary White. I absolutely have, and I practiced that.
Senator Cleland. As did I, and yet my observation when Mr.
Lay was here, and it has been confirmed by others, when Mr.
Skilling and others attempted to appear, was that the top
officers of Enron, when push came to shove and the stock prices
began declining, that the top 28 officers at Enron cashed in
stock worth about $1 billion, and that in the economic turmoil,
the economic warfare that they faced, Enron officers ate first,
which to me is very disconcerting.
You have got a great history of being in the military. With
the ethics of the military which you and I share, then I am
disturbed that you spent 11 years with a crowd where Glen
Dickinson, a former Director of Energy Services, has reportedly
described the culture of Enron as, close the deal, worry about
the details later, and Enron, as I pointed out, has now become
the poster boy for the infectious greed description by Mr.
Greenspan a couple or 3 days ago describing certain corporate
misdeeds. I wonder how you square that.
I mean, you were in the Army for 28 years. You have a
certain sense of ethics, and then you were at Enron for 11
years. Did you find yourself whipsawed there between the ethics
of two different entities? Did you see at Enron an infectious
greed? Did you see officers eating first? Did you see what has
been described as, close the deal, worry about the details
later ethics?
Secretary White. I have to say in start, the answer to your
question, that I, like thousands of other people, have been
appalled and outraged by the facts that have come to light
since I left the corporation, and particularly the facts that
have come to light since 16 October of last year, when the
earnings release was made and earnings were restated, and other
facts have come to light that certain corporate officers were
benefiting from arrangements that they had made at the expense
of Enron shareholders, and that as an Enron shareholder, and
someone who believed in the company from the day that I entered
it until the day I left it, I am appalled by what has happened.
I cashed out part of my Enron stake because I had to
satisfy the divestiture requirements of joining the Government.
I took straight over the cliff, along with thousands of other
investors, in my particular case 665,000 options that I never
cashed in that I sent back to the company because I believed in
the company, up until the revelations that came out following
the third quarter earnings release of nine months ago.
This was a corporation that was rated most innovative in
the country six years in a row by FORTUNE magazine, and
thousands of us that worked at that company were proud of what
we were accomplishing, believed that energy markets should
deregulate, believed that that was the best way to give
consumers choice and lower prices. That was the crusade we were
on, and so I am ashamed of what has happened to that
corporation and the damage that it has done to all of us and
thousands of people, the pipeline group I used to run, third
generation Enron employees, field engineers, is a tremendous
tragedy in Enron.
And I will also say I am responsible as an officer of the
company for the portion of that company that I ran, Enron
Energy Services, and the deals that we put together within the
accounting structure that was accepted and was the standard in
the industry, I stand behind, that were signed and the right
deals to do, and were properly accounted for at the point that
we signed those up.
Senator Cleland. That is my next question. Were you
concerned, were you worried when you signed off on Enron Energy
Services' use of accounting practices that booked profits based
on optimistic projections of future market conditions, that
investors were getting a less than honest picture of Enron's
earnings?
Secretary White. Well, the question, Senator, is, number 1,
is mark-to-market accounting appropriate, which is an FASB
question to answer. It happens to be the accounting standard of
the industry, and second, were the forward curves for energy
against which the deals were priced, were they accurate, were
the assumptions reasonable to be made, and from our perspective
in the retail business, we did not control the curves. They
moved around frequently.
Sometimes we made money from the change in the curves. A
lot of times we lost it. We didn't control the curves as they
were structured. They were the best estimates of the forward
deal, and that's the way the business was run, not only in the
retail business but in the wholesale, as well, and in every
other company that competed in this marketplace of forward
energy products.
Senator Cleland. My time has expired, but you were Vice
Chairman of Energy Services during a time when it was being
used by Enron as part of the so-called Fat Boy scheme. Now, Fat
Boy sounds almost like a military operation, but that scheme
allowed Enron to be paid for artificially created excess
electricity generation, yet you have reportedly said you were
unaware of Enron's use of this strategy, because Energy
Services was a customer of Enron's Wholesale Group and you were
not privy to their strategies, is that correct?
Secretary White. Yes. What we presented the Wholesale Group
with, specifically EPMI, was, here's the load that we have in
the State of California that's represented by our retail
customers, and here's the money for scheduling with the ISO,
our load, and if we bought the commodity from a third party,
here's the fee that we will pay you to sleeve that commodity
and schedule it.
What the Wholesale Group did with that load between
themselves and the ISO was the Wholesale Group's business. It
was not in our interest to see the price of power escalate in
the State of California from a retail perspective, so the Fat
Boy setup, or Ricochet, or anything else that showed up in
those power memos we were not participants in. That was not our
interest.
The reason we were in the California wholesale power market
is, we had retail load. We were not in the California power
market for the sake of buying and selling and swapping and
trading, and whatever else, electricity. We were there to serve
retail customers.
Senator Cleland. Thank you very much, Mr. Secretary. My
time is up.
Senator Dorgan. Mr. Secretary, let me just make a point on
this issue. We will come back to it, but the point in the
memorandums, with respect to Fat Boy, for example, which was a
scheme or a strategy, is that the scheme of Fat Boy could not
possibly work without EES.
Secretary White. You mean without our load?
Senator Dorgan. Yes.
Secretary White. Well, what would you like to do with my
load? I have a customer that has to be served. I have to get it
scheduled with the ISO. I hire EPMI to do that on an arm's
length basis, and they go schedule it. It's got to be
scheduled.
Senator Dorgan. Well, I will turn to Senator Boxer quickly,
but EPMI, which is another Enron organization----
Secretary White. That's the Wholesale Power Group.
Senator Dorgan. Total sales, this is fourth quarter 2000,
$178 million, $178.2 million, total purchases, $178.1 million.
They only delivered 98,000 megawatts, so there is massive
purchasing going on, and the allegation has been made that EES
substantially inflated their load routinely in order to create
this congestion.
Secretary White. Why on earth would we do that? There is
no----
Senator Dorgan. Because it is the only way that Get Shorty
works, or Fat Boy works.
Secretary White. But whose strategy was Get Shorty?
Senator Dorgan. It was the Enron Corporation strategy.
Secretary White. No, it was the Wholesale Group's strategy.
Senator Dorgan. It is still part of the Enron Corporation.
You are all kissing cousins here. It is the same umbrella.
Secretary White. Let me tell you something, when we had our
profit and our numbers and our targets to make and the
Wholesale Group had separate targets to make, we were not
kissing cousins when it came to the arm's length arrangements
between the groups.
Senator Dorgan. Well, when the difference was between the
interests of the company, the Enron Corporation, or your
divisions, which interest wins?
Secretary White. The division.
Senator Dorgan. I do not think the CEO of the company is
going to let you get by with that very long.
Secretary White. That's the way the business ran.
Senator Dorgan. Well, I will come back to that. Senator
Boxer.
Senator Boxer. Mr. Chairman, I never saw so many smart
people running away from the truth.
Secretary White. I'm not running away from the truth.
Senator Boxer. I am making a comment, and I have a number
of questions, and I hope my chair will allow me to stay as long
as it takes, because there are so many things I want to ask you
on behalf of Californians and shareholders, and people who
count on pensions, and I have to say you came to the California
market to do good, and here is what you did.
Before we get to that, I want to show this other--here is
what happened while you were there. This is what happened to
the price, and take that overlay off. It went straight up to
the sky, and our state almost went bust, so it did not work out
the way you had hoped.
Secretary White. I absolutely agree with what you just
said.
Senator Boxer. I did not ask you a question. You compared
yourself to the others that got hurt and were stunned, and it
is awful, and I would ask you in the name of--I do not even
know the word--candor not to do that. From what I understand
you made over $50 million in your time at Enron, not counting
stock options and the rest. The average American income, per
capita, is about $25,000 a year, so let us just not compare
yourself to those people or, frankly, I cannot compare myself,
because I do better than that.
Secretary White. Good.
Senator Boxer. Please allow me to make my point. You said
you gave up your options, but this is after you made about $50
million, but we will get the exact amount from the company, and
sold more than $12 million worth of stock, so I just do not
think you compare to someone like Elisa Hollis, and I ask
unanimous consent to put this statement in the record.
Senator Dorgan. Without objection.
Senator Boxer. ``I was employed by Enron for 5\1/2\ years
and was one of the thousands laid off in December . . . I was
surrounded by dedicated, hard-working, decent people and I was
proud to be part of it . . . The dishonorable actions of a few
greedy Enron executives ruined my, and countless others',
financial security. I lost my job. My severance payment was \1/
5\ of the amount they agreed to when they hired me . . . And of
course my retirement account was wiped out. The losses from my
401(k) and stock were staggering: once valued at more than
$140,000, are gone forever. In short, my family has been
financially devastated . . . My husband is a carpenter, making
a modest wage. His income and my unemployment leaves us $1,500
short every month, whereas before, we had that much to spare.
And guess where we put most of it? . . . The people whose
actions caused this to happen were already rich by most
people's standards. They shouldn't need legal incentive to
perform their fiduciary duties ethically. Just moral decency,''
and the rest will go in the record.
[The prepared statement of Ms. Hollis follows:]
Prepared Statement of Elisa Hollis
I was employed by Enron for 5\1/2\ years and was one of the
thousands laid off in December. My career at Enron began as a part-time
implementation specialist and ended as manager. I was surrounded by
dedicated, hard-working, decent people and I was proud to be a part of
it.
I am here today because I am extremely concerned that the 401k
reform bill that was recently passed is completely inadequate, and
because of the negative implications on the privatization of social
security. It must be made absolutely clear that there will be
meaningful, unpleasant consequences to anyone trying to cheat their
employees out of their retirement savings.
The dishonorable actions of a few greedy Enron executives ruined
my, and countless others', financial security. I lost my job. My
severance payment was one fifth of the amount they agreed to when they
hired me. They found a loophole to avoid the 60 day advance notice of
layoff or payment in lieu of notice. My family's monthly expenses had
been well within our means, but now I use credit cards to pay for basic
necessities. Health insurance alone consumes 20% of our monthly income.
My stock options, which I was counting on to help pay for my daughter's
college education, are completely worthless. She's a freshman in high
school, and while I have contributed to a college savings plan, it's
only enough to get her started. And if I should fall behind on any of
my current payments, obtaining a loan for her will be impacted. And of
course my retirement account was wiped out. The losses from my 401k and
stock were staggering: once valued at more than $140,000, are gone
forever. In short, my family has been financially devastated.
We moved to Houston from beautiful Central Pennsylvania because
Enron bought the company I worked for, then closed down its
Pennsylvania office. It was move, and have a chance for a great career,
or lose your job. My husband is a carpenter, making a modest wage. His
income and my unemployment leaves us $1500 short every month, whereas
before, we had that much to spare. And guess where we put most of it?
While I have recently performed some independent contracting, I am
still looking for work, and despite what I consider to be a strong
resume, I have yet to receive an interview let alone a job offer. Is
this because of the weak economy, or is there a stigma associated with
having worked for Enron? Many of my former colleagues are in the same
situation as me.
The people whose actions caused this to happen were already rich by
most people's standards. They shouldn't need legal incentive to perform
their fiduciary duties ethically. Just moral decency, really. But it's
obvious that they do need incentive. So we have to make sure that new
laws are put in place to help convince any Enron wannabes that there
will be meaningful, unpleasant consequences for greedy, self-serving
behavior that harms innocent people. And the law must provide a means
for restitution for those they harmed.
The Boehner bill that was recently passed does not provide this. In
fact, much of what it includes, Enron already provided to its
employees. This bill cannot be allowed to be the only legislative
reform adopted in response to what happened at Enron.
Senator Kennedy's bill addresses so many of the problems that Enron
brought to light and will make a real difference. Why is it so hard to
pass a law that makes clearly unethical behavior illegal? I hope public
awareness will help to get the Kennedy bill enacted.
The final point I'd like to make is that social security and
pension plans must not be privatized, but should remain a guaranteed
form of retirement income. Otherwise, they'll be at risk for the same
kinds of Enronian abuses the country, and I, are so angry about.
Thank you for inviting me to participate in this discussion.
Senator Boxer. Now, here is this woman, she says that once
in Houston she attended most of these floor meetings held
semiannually, which are typically presented by upper level
executives. She says, ``I was in attendance at one such floor
meeting at which Mr. White was the presenter.'' She thinks it
was December 2000, or early January 2001. That is 11 months
before bankruptcy. ``The meeting was held on the fifth floor of
the 500 Jefferson Building . . . There were probably 60 people
in attendance . . . someone asked Mr. White specifically
regarding his opinion of the current stock price and where it
might go from there. Mr. White responded by extolling the past
performance of Enron's stock, citing how wealthy it had made
him and so many other Enron employees. He encouraged us all to
take full advantage of our investment opportunities as Enron
employees, and expressed his opinion that its value should rise
to $120 by the same time next year.'' The rest will go in the
record.
[The letter of Ms. Hollis follows:]
July 8, 2002
Dear Senator Boxer,
Your aide, John Hess, spoke with me recently regarding my
recollections of certain statements made by Tom White to a number of
his employees. I am writing today as a result of Mr. Hess's request
that I draft a statement detailing my recollections.
I was employed by Enron from April 29, 1996 to December 3, 2001. I
was hired on April 29, 1996 by a company located in Pennsylvania, named
OmniComp, that Enron purchased on January 1, 1997. OmniComp became a
wholly owned subsidiary of Enron and a part of its Energy Services
operations, of which Mr. White was Vice Chairman. Mr. White visited our
offices in Pennsylvania on a couple of occasions and was involved in
the decision to move our operations to Houston, which took place in
early 1999. While I had little opportunity to interact in detail with
Mr. White, he recognized me as a member of the OmniComp team, and we
interacted on a superficial level on a few occasions.
Once in Houston, I attended most floor meetings, held semi
annually, which were typically presented by upper level executives. I
was in attendance at one such floor meeting at which Mr. White was the
presenter. I do not recall the exact date of the meeting, and while it
was noted on my electronic business calendar, that calendar was stored
on my computer located in my Enron office, to which I no longer have
access. My best guess is that the meeting occurred in mid December,
2000 or early January, 2001. The specifics I do recall are:
The meeting was held on the fifth floor of the 500 Jefferson
Building (walking distance from Enron's main building at 1400
Smith Street). The space had recently been renovated and most
of the offices had doors as opposed to cubicles. We convened in
the open space between the rows of offices. There were probably
60 people in attendance.
That our stock was doing better than it ever had at the time of
the meeting--in the mid 80's.
That someone asked Mr. White specifically regarding his opinion
of the current stock price and where it might go from there.
Mr. White responded by extolling the past performance of
Enron's stock, citing how wealthy it had made him and so many
other Enron employees. He encouraged us all to take full
advantage of our investment opportunities as Enron employees,
and expressed his opinion that its value should rise to 120 by
the same time the next year.
I wish I still had access to the documentation I had as an Enron
employee, as it would at the very least provide dates. I'm afraid this
is the best I can do.
Good luck with your investigation!
Sincerely,
Elisa Hollis
Senator Boxer. I wonder if you got back to those people to
tell them, be careful, do not put all your eggs in this basket.
Did you ever do that?
Secretary White. No, I never gave them personal financial
advice.
Senator Boxer. OK. Well, I would say, Mr. Chairman, that it
looks pretty clear that it: ``encouraged us all to take full
advantage of our investment opportunities''.
I want to switch to this chart, this next chart. Secretary
White, you made 74 phone calls. This is what you handed over to
Congressman Waxman.
Secretary White. Seventy-seven.
Senator Boxer. Seventy-seven phone calls during the period
shown, all the while selling off your shares. I want to talk to
you about the connection between the phone calls and the dates
you sold. I want to put it into perspective.
Martha Stewart is being investigated by the SEC for a few
phone calls. I am glad they are looking at what was going on
there, but a few phone calls. The House is having hearings on
Martha Stewart and insider trading. I wonder, have you been
contacted by the SEC about these phone calls and your
divestiture?
Secretary White. No.
Senator Boxer. Well, Mr. Chairman, this is troubling to me,
because I think if you are going to investigate someone for
three or four phone calls, you ought to take a look at this. I
want to have an overlay. Can we do the overlay, John?
I think what is important to note is, on May 24, you became
Secretary of the Army, and what date did you become head of
Pentagon Homeland Security, on October 3? Would you point that
date out? So you made about, more than 50 phone calls after you
were made head of Homeland Security. After we were attacked on
9/11 you made over 50 phone calls, and then--and then, I am
just amazed that you had the time to do this.
Now, you have given two answers to the question, what did
you talk about with these people who were Enron, a lot of them
Enron insiders? First you said it was personal, then you said
you did discuss the company. Which is it?
Secretary White. Both. How could you not? It was in the
newspaper every day. First of all----
Senator Boxer. How could you not what?
Secretary White. The overall condition of Enron was front
page news from 16 October forward.
Senator Boxer. It sure was, but wouldn't those people you
called, some of whom were on the Board of Directors, have more
information than was in the news?
Secretary White. We didn't discuss it. We didn't have to
discuss it. It was in the newspapers.
Senator Boxer. Let me note, and I will stop here and come
back, that I tried to get in touch with all the people that you
spoke to. They will not talk to me. They will not discuss what
they talked about. They will not verify what you said, or say
anything. Then we called their lawyers. They will not talk to
me, either.
I will just say to you, Mr. Secretary, you are an honorable
man. You are a man of great experience. Maybe you did not know
too much about how this would look, but I just want to give you
my opinion, as a former stockbroker many years ago. It does not
look good to have all of these escalating number of phone
calls, the divestiture of stock following those, calling all of
those insider people. It just does not look right, just like it
does not look right for Martha Stewart to call her best friend
to talk about a number of things.
And the fact is, you say it was not necessary to talk to
these people, it was on the front pages. Then why won't those
people talk to me and just say, hey, it was on the front pages?
So I would hope that the SEC would look at this and let us let
them look at it without any particular agenda other than to
find out the truth on this point, and this is my trouble with
the SEC. I just do not see them doing what they should do. If
there is no there there, they will figure it out, but it is not
our job, but this is what Senator Nelson and I have put
together from the information that we have, and it is very
troubling to me.
The last point is, particularly after you had your
personnel over there 24/7----
Secretary White. Can I respond to all of this?
Senator Boxer. Yes. You had your personnel over there 24/7,
and I do not think they had time to make any phone calls,
period, not even to their mother.
Secretary White. First of all, there were 77 contacts that
I identified to Congressman Waxman. Fifty of those, 51 of those
were from my home phone. This is over a seven- or eight-month
period that we are talking about. Twenty-some were from my
office. That is about three a month. That to me is not an
outrageous amount.
Second point, most of the people that I talked to on this
list, like Bob Hurt, are my old friends. They were my friends
in the Army before we got together in Enron. They are my
friends today. Most of them are gone from Enron. Fifty-some of
these calls are from my home phone. Some of them were made by
my wife, because in most of the cases my wife and the wife of
the gentlemen that I worked with are good friends, and so I
couldn't differentiate between those I made and those that she
made.
Third, they are my personal friends. They were concerned
about what had happened here on 11 September, and the war and
the anthrax and everything that all of us have dealt with in
Washington. I was concerned about their situation at Enron for
all the points that you referenced with the lady that lost her
job, and that was the nature of the conversation, and let me
just say categorically that all of us on the Defense team have
worked hard to prosecute this war.
Senator Boxer. I never said you didn't.
Secretary White. Well, yes you did, in a way, and I just
want to say that implying that 77 phone calls somehow detracted
from my ability to run the Army and this war. I am just not
going to sit here and accept that. I fundamentally disagree.
Senator Boxer. Sir, you have every right, and I close at
this point, but I need to respond to you.
I hope the SEC--and I am going to call Mr. Pitt
personally--is going to take a look at this, because I am not a
prosecutor. All I know is, to me it does not look good, and
where one makes a call from does not matter, or if one just
says something to the person next to them. I know something I
want to share, and not one of those people will take my call,
not one of those people will answer the question, because I
wanted to know--I did not want to do this. I wanted to know
what the story was, and I cannot get one of those people to
talk to me, to talk to anyone on this Committee. It is
extremely frustrating.
The last point I would make is this. All of us went through
a change on 9/11. You did, I did, every American did. I am
speaking for myself and I believe for my colleagues. Things--
the world changed for us. We were on edge for every minute of
every one of those days, and after we had troops in Afghanistan
it was the same thing, and all I am saying is, it is my
opinion, and I know you are a very skillful man, but I believe
in my heart of hearts that this does not look right to me.
I was not born yesterday. It does not look right, and I
just have to say that, and I am going to turn this information
to the SEC. I do not know what good it will do. I asked them to
look at Mr. Skilling--I have not heard back yet--in terms of
insider trading. I asked them to look at Mr. Lay and I have not
heard back yet, but that is where we are on that point.
Senator Dorgan. Senator Carnahan.
Senator Carnahan. Secretary White, when you left Enron your
annual salary was $5\1/2\ million. You subsequently sold Enron
stock for $12 million, and yet many Enron employees who lost
their jobs following bankruptcy will not ever receive even the
modest severance pay which they were due.
In light of the economic devastation experienced by so many
of your former colleagues, do you still believe that your
compensation level was appropriate?
Secretary White. Yes. I think that it was approved under
the compensation plan of the corporation by the Board of
Directors. It was not at all unique to me, and let me express
again my feelings of the scope of the tragedy that has impacted
everyone.
Senator Carnahan. In your testimony today, you claim you
carried out your responsibilities in an entirely ethical
manner, but your records seem to show otherwise. As an Enron
employee, you lobbied the military to privatize energy
services, and when you became Secretary of the Army, you
aggressively pursued this policy change. Only when pushed on
the matter did you recuse yourself, and then only in part.
The government's ethical standards required that you sell
your shares of Enron stock within 90 days. However, you failed
to meet that deadline. You have not done everything you could
do to avoid the conflict of interest. I wonder how you can
claim, under those circumstances, to have conducted yourself in
an ethical manner.
Secretary White. Well, let me deal with the two parts of
the question, Senator. The first is, utilities privatization.
Utilities privatization was authorized by the Congress in the
previous administration. The previous leadership of the
Department of Defense set as a goal September 2003 to complete
it. This is privatization of gas, electric, water, and
wastewater utilities. It is absolutely the right thing for the
Department to do, to get outside capital and expertise to do
that. I have pushed it hard as Secretary.
Since I have been Secretary, Enron or any of its affiliates
have not gotten a single shred of business from the Department
of the Army and, in fact, in the one agreement they did have,
they defaulted on it after they went bankrupt and the contract
officer terminated it, so to my knowledge there is no
relationship whatsoever between the utilities privatization
business of the Army and anything that has to do, anything with
Enron. It continues to be the right thing for us to do, and I
will continue to push it.
On our ethics agreement, I was granted a 90-day extension
by the Senate Armed Services Committee, of which you are a
member, to that ethics agreement, and I completed my stock sale
before the end of that agreement and, as I said earlier, I
never cashed in, because they were out of the money, a large
quantity of options that went along with it, so my contention
in the opening, my opening statement that I've operated in an
ethical manner both while at Enron and as the Secretary of the
Army I stand by.
Senator Carnahan. Thank you.
Senator Dorgan. Senator Nelson.
Senator Nelson. Thank you, Mr. Chairman.
Mr. Secretary, I am sure this is a very difficult time. We
had you, as is required by the Constitution, in front of the
Armed Services Committee and, upon examination and your
approval there, certain agreements were brought out in which
you agreed to the following, and this is a letter dated May 4,
2001, to the Acting General Counsel of the Army and designated
agency ethics official, and it is a letter from you.
``As of May 15, 2001, or upon my appointment if appointed
sooner, I will no longer be employed by Enron Energy Services,
and I will request full and complete payment for all services
rendered Enron Energy Services at that time. I will also
receive a payment of $1 million from the Enron Corporation upon
my termination, as well as $13 million in payment for my
phantom stock award.''
Your letter further states, ``I understand that this
constitutes an extraordinary payment under such and such of the
statutes, and therefore for 2 years after this payment is
received I will not participate in any particular matter in
which Enron Corporation is or represents a party unless I
receive a written waiver pursuant to section such-and-such.''
You then list executive perks such as, stock options, cash
balance retirement account, Enron savings plan, Enron stock
ownership, and within 90 days of appointment I will divest
myself of my Enron Corporation stock options, stock, and all
the other things that I just mentioned there, the cash balance
retirement account, the savings plan and so forth. Mr.
Chairman, I ask that this letter in full text be included in
the record at this time.
Senator Dorgan. Without objection.
[The letter of Mr. White follows:]
May 4, 2001
Mr. Tom Taylor
Acting General Counsel and
Designated Agency Ethics Official
Department of the Army
Washington, DC
RE: Actions to Avoid Potential Conflicts of Interest
Dear Mr. Taylor:
Upon confirmation by the United States Senate to the position of
Secretary of the Army, I will take the following actions to avoid
potential conflicts of interest or appearances of a conflict of
interest:
Enron Energy Services Incorporated
Employment. As of May 15, 2001, or upon my appointment if appointed
sooner, I will no longer be employed by Enron Energy Services, and I
will request full and complete payment for all services rendered Enron
Energy Services at that time. I also will receive a payment of
$1,000,000.00 from Enron Corporation upon my termination as well as
$13,000,000.00 in payment for my Phantom Stock award. I understand that
this constitutes an ``extraordinary payment,'' under 5 C.F.R.
Sec. 2635.503, and therefore, for 2 years after this payment is
received, I will not participate in any particular matter in which
Enron Corporation is or represents a party, unless I receive a written
waiver pursuant to section 2635.503(c).
Stock Options. Within 90 days of appointment, I will divest myself
of my Enron Corporation stock options.
Cash Balance Retirement Account. Within 90 days of appointment, I
will divest myself of my Enron Corporation Cash Balance Retirement
Account. This account holds only Enron Corporation stock.
Enron Saving Plan (Retirement Plan). Within 90 days of appointment,
I will divest myself of my Enron Saving Plan. This plan holds only
Enron Corporation stock.
Enron Stock Ownership Plan. Within 90 days of appointment, I will
divest myself of my Enron stock held through the Enron Stock Ownership
Plan.
Stock. Within 90 days of appointment, I will divest myself of all
other Enron Corporation stock.
Until these divestitures are made, and pursuant to 18 U.S.C.
Sec. 208, I will not participate personally and substantially in any
particular matter that will have a direct and predictable effect on
Enron Corporation.
Other Positions Held Outside The U.S. Government
Catalytical Energy Systems, Incorporated
After confirmation, but not later than 30 days after appointment, I
will resign my position as Director, Catalytical Energy Systems,
Incorporated.
Greater Houston Area American Red Cross
After confirmation, but not later than 30 days after appointment, I
will resign my position as Vice-Chairman, Greater Houston Area American
Red Cross.
Furthermore, pursuant to 5 C.F.R. 2635.502, for one year after I
terminate my positions with Catalytical Energy Systems, Incorporated,
and Greater Houston Area American Red Cross, I will not participate in
any particular matter involving specific parties in which any of these
entities is or represents a party, unless I am authorized to
participate.
I intend to retain my partnership interest in the T.E. White Family
Limited Partnership. Currently, the limited partnership holds Defense
contractor stock. I will transfer all holdings that I am required to
divest out of the T.E. White Family Limited Partnership into my
personal account. Within 90 days of appointment, I will divest these
holdings. Where applicable, prior to divesting, I will request a
certificate of divestiture from the Office of Government Ethics.
Finally, I will ensure that the T.E. White Family Limited Partnership
will not invest in any company that does business with the Department
of Defense. I will consult with you before the partnership makes any
new investments.
Defense Contractor Stock
Within 90 days of appointment, I will divest myself and the T.E.
White Limited Partnership of holdings in defense contractor stock.
These holdings are:
AOL Time Warner Analog Devices, Inc.
Antec Corp. Applied Materials
Cisco Systems, Inc. Cognos Inc.
Computer Associates Corning Inc.
EMC Corp. Electronic Data Systems
Exodus Globix Corp.
Network Appliance Oracle Corp.
Peregrine Systems Inc. Progress Software
Real Networks Inc. Siebel Systems, Inc.
Solectron Corp. Sun Microsystems
TellLabs Inc. Texas Instruments
Tycom 3Com Corp.
Veritas
Where applicable, I will request a Certificate of Divestiture from
the U.S. Office of Government Ethics. Until divestiture is complete, I
will not participate personally and substantially in any particular
matter that would have a direct and predictable effect on the financial
interests of these companies, unless I first obtain a written waiver or
qualify for a regulatory exemption.
I also understand that the following stock holdings present a
potential conflict of interest under 18 USC 208(a), although it has
been determined that it is not necessary at this time for me to divest
these interests:
Extravision Juniper Networks
TTM Tech Amdoca Ltd
Flextronics International BEA Systems Inc.
Celestica Inc. Ciena Corp.
DoubleClick Inc. EBay Inc.
Jabil Circuit Inc. KLA Tencor Corp.
Lattice Linear Technology
McData Corp. Openwave Systems Inc.
Palm Inc. QLogic Corp.
Sanmina Corp. Vitria Technology
XO Communications Xilinx Inc.
I will not participate personally and substantially in any
particular matter that will have a direct and predictable effect on the
financial interests of these entities, unless I first obtain a written
waiver or qualify for a regulatory exemption.
Investment Limited Partnerships
DLJ Private Equity Partners Fund II
Within 90 days of appointment, I will divest myself of the DLJ
Private Equity Partners Fund II because I have no knowledge of the
underlying holdings and I am unable to ascertain the holdings due to
confidentiality agreements signed by the general partner of the Fund.
Where applicable, I will request a Certificate of Divestiture from the
U.S. Office of Government Ethics.
WSW 1996 Exchange Fund
Within 90 days of appointment, I will divest myself of the WSW 1996
Exchange Fund.
Where applicable, I will request a Certificate of Divestiture from
the U.S. Office of Government Ethics. Until divestiture of the
investment partnership is complete, where I have knowledge of
underlying holdings, I will not participate personally and
substantially in any particular matter that may have a direct and
predictable effect on these holdings.
Other
I am aware of the requirements of the Federal criminal statute, 18
U.S.C. Sec. 208, concerning my financial interests and financial
interests imputed to me, as well as the executive branch impartiality
regulations contained in Subpart E of 5 C.F.R. part 2635. I understand
that I am personally responsible for being aware of my financial
interests. Further, should I have any question as to the application of
any of the conflict of interest statutes or regulations to a specific
asset or situation, I recognize the need to immediately seek advice
from you.
Sincerely,
Thomas E. White
Senator Nelson. Now, on this chart that Senator Boxer and
I displayed, the letter was May 4 and your appointment was on
May 24, and you had 90 days in which to execute all of these
trades. Within a month, basically you sell a little less than
half of your stock and, of course, I think you have already
stated you wished you sold it all.
Secretary White. Well, you can see from that curve that is
absolutely the case.
Senator Nelson. All right. Why did you wait to sell here,
and then why did you ask for an extension?
Secretary White. I asked for an extension because, Senator,
I had certain investments in private equity funds that could
not be liquidated within the 90-day period, and I needed the
basic extension for that. I sent a letter to Senator Levin, the
Chairman, and also Senator Warner, and they granted the
extension to 25 November.
Senator Nelson. All right. Tell us about these telephone
calls. Well, you just testified as to the telephone calls, and
that testimony is relevant, what you just stated, to all of
these telephone calls.
Secretary White. Yes.
Senator Nelson. All right. Tell us about these meetings.
Secretary White. The meetings were mainly old friends of
mine that were coming through Washington and wanted to say
hello. They had never seen the Secretary of the Army's office.
They were concerned about how I was doing, I was concerned
about how they were doing, and so we would have a short
meeting. The meetings were maybe 10, 15 minutes in duration. I
had one luncheon meeting with a fellow named Chris Holmes who
had worked for me for a number of years at Enron and who was
leaving Enron and wanted some advice, and I had another dinner
with, in January of 2002 with Stan Horton, who was my partner
in running all of the physical assets of Enron over the years,
and we were very close friends. So that was the nature of the
meetings.
Senator Nelson. In either the meetings or the telephone
calls, did you talk to Enron employees about the stock price?
Secretary White. About the stock price? Yes, because it
affected their lives personally. It was what you were reading
in the newspaper every day, looking at that chart, and the
deterioration of the price, it would be an obvious point of
discussion.
Senator Nelson. Now, these on this chart are all direct
stock sales. What about the other things that you agreed to in
the letter? When did they occur, for example, the stock
options? ``I will divest myself of Enron Corporation stock
options.'' When did that occur?
Secretary White. Actually I never could cash the stock
options because by the end of the period, November 25, all the
stock options were out of the money so they couldn't be
exercised, and so I sent a letter to the company in January
revoking my rights to the out-of-money stock options and
sending them back to the company unexercised.
Senator Nelson. Was that the same on all these other things
you had agreed to?
Secretary White. No. Each one of them are different. The
cash balance retirement plan I converted into an annuity in
October. A part of the annuity--and that was an unwise choice,
as it turns out, because a part of the annuity is paid for by a
third party, part of the annuity is paid for by Enron, and
Enron has defaulted on its obligation on its piece. That was
done in October.
Senator Nelson. How about the savings plan?
Secretary White. The savings plan was divested in the time
period allowed.
Senator Nelson. And the stock ownership plan?
Secretary White. The--all those shares were sold.
Senator Nelson. What did you say was the reason for the
extension? The extension would have been June, July, August, so
it would have been--here it would have been the 90 days. I bet
you wish you had sold it within the 90 days, don't you?
Secretary White. I certainly do, yes, but that was not the
case, and that gets back--that's a good point. I--and this
pattern of sales indicates that I believed in the company.
Senator Nelson. What was the reason for the extension?
Secretary White. The reason for the extension was, I had
private equity investments, and because they were illiquid,
they could not be unwound within the 90-day period. One of them
was an exchange fund and one of them was a private equity
partners private fund, and it takes longer than the 90 days,
typically, to unwind that type of investment.
Senator Nelson. And you had to unwind those in order to get
the stock, to dispose of the remainder of the stock?
Secretary White. Yes, because it is up to the general
partner. What you own are units in the fund, and the general
partner runs the fund. You're a limited partner, so you don't
control that.
Senator Nelson. Now, when you are having all of these
contacts--I have been through this before with regard to the
sale of stock on a downward slope in the Florida Pension Fund,
of which I was wondering who was calling pension fund managers
to buy in order to prop up the price of the stock. You said
that your conversations herein whether it is meetings or
whether it is a telephone call you say is just incidental
conversations.
Secretary White. They are all old friends of mine, and as a
matter of fact, if you look at what drove that stock price
there were two significant events in that period. The first was
the resignation of Jeff Skilling as the CEO of the corporation
in August. The second was the third quarter earnings release,
where it became quite clear to all of us that these off-balance
partnerships and so forth were not as they had been portrayed
before, and very shortly after the third quarter earnings
release the company goes over the cliff.
Senator Nelson. OK. Now, clearly at this point you had an
agenda of privatization of some of the Army systems.
Secretary White. That's right. I still do.
Senator Nelson. Well, talk to us then about some of these
defense contracts, for example, your involvement with a
potential contract to run the utility systems at Fort Hamilton
in Brooklyn.
Secretary White. As I said, the history of utilities
privatization at the Defense Department, it was authorized by
the Congress in 1997, signed into law, as you know. The
Department of Defense then put a program together to complete
this by September 2003. We competed--Enron Energy Services
formed a business unit to compete for that business, and EES
was awarded the first contract award, which was Fort Hamilton,
New York--Senator, you are from Brooklyn, I believe--not far
from where you are from, and we began and took over the
utilities, gas, water, electricity, and wastewater as a part of
that program.
Senator Nelson. About what time did that negotiation occur
on this chart showing May to June?
Secretary White. It wasn't on that chart. The award at Fort
Hamilton predated my becoming Secretary of the Army.
Senator Nelson. Why was the contract structured as a lease?
Secretary White. Because that was the most--well, the
government structured it as a lease. I was on the other side of
the equation. It made more sense to the government to do it as
a lease than as a sale of a capital asset.
Senator Nelson. So you are saying you had no involvement in
the contract at Fort Hamilton?
Secretary White. It was--the business team that sat on the
other side of the table for the government and negotiated the
contract was a part of EES. It was a retail endeavor, and we
competed for that, and I put the business unit together to
compete for the business.
Senator Nelson. Were you involved with any other military
contracts that Enron may have been pursuing?
Secretary White. No. With the government, you mean, with
the military?
Senator Nelson. Yes.
Secretary White. We bid on a lot of other installations,
not only for the Army but the other services that were going
through the solicitation process, but Enron up until the time I
left was not successful in any of those bids, so I think it is
fair to say Fort Hamilton was the only contract they won.
Senator Nelson. Were you involved in any privatization
efforts during the year 2001 with the Enron Corporation when
you were dealing as Secretary of the Army?
Secretary White. No, none.
Senator Nelson. Thank you, Mr. Chairman.
Senator Dorgan. Senator Nelson, thank you.
Secretary White, the Attorney General's Office of
California contends that EES was engaged in systematically
overstating demand and essentially trying to create a false
load, which is what allowed the wholesale side of the business
to make a substantial amount of money. Are you aware of
activities by which the division that you headed would
overstate demand in the California marketplace for electricity?
Secretary White. No, and it would have made no commercial
sense for us to do that as a retail entity, as we talked about
before.
Senator Dorgan. So you believe the Attorney General is
wrong?
Secretary White. Yes.
Senator Dorgan. The independent system operator believes
the same thing. They are wrong?
Secretary White. Well, we didn't have a direct relationship
with the independent system operator. We went through EPMI for
all scheduling and interface with the ISO, a service that we
paid for from EPMI.
Senator Dorgan. The head of the California Public Utilities
Commission believes that EES was inflating and overstating its
loads.
Secretary White. I was not aware of any, to my knowledge I
was not aware of any overstating of load in the State of
California beyond what we needed to serve retail customers. I
just cannot imagine why it would have been in our commercial
interest to do so.
Senator Dorgan. Is it possible that the organization you
headed was overstating the load and creating a false load
without your knowledge?
Secretary White. It could be. Anything is possible. I am
just telling you that I had no knowledge of it and, on its face
value, from the way our business was run it doesn't make any
sense.
Senator Dorgan. You are aware that in California, I
believe, there were scheduling coordinators. There was an EPMI
scheduling coordinator that helped schedule the load, is that
correct?
Secretary White. That's correct.
Senator Dorgan. And there was an EES scheduling coordinator
in California.
Secretary White. Yes, and I am sure that the job of the EES
was to schedule the load through the EPMI coordinator.
Senator Dorgan. And, so, would they have sat in close
proximity to each other, been in regular contact with each
other?
Secretary White. I am sure there is regular contact. I
don't know whether they sat in close proximity.
Senator Dorgan. And so a corporation that discloses to us
that it had schemes or strategies called, for example, Get
Shorty, Fat Boy, and so on, in which in black and white it
suggests that you have different parts of the company that can
create and manufacture loads that are artificial and,
therefore, the one side of the company can make a handsome
profit, a very substantial profit, and the other side perhaps
has a loss. Incidentally, your side in most cases had a loss.
If you were in our position up here taking a look at an
internal company document that says, here are our schemes and
strategies, and the strategies rely on your organization's
ability to be a part of that strategy, would you think that it
is very improbable that you would not have known about that?
Would you not be as suspicious as we are?
Secretary White. I can see where you would have that
suspicion, certainly, but I would also say that those memos
outline a wide variety of strategies, wholesale trading
strategies in the State of California, one of which--one of
which seemed to feed on the load forecasts and the load
scheduling services that we as a retail business were paying
for from EPMI.
Senator Dorgan. But Secretary White, the California
officials say that strategy worked. They allege that the
organization that you ran was engaged in the strategy by
inflating loads, and you say to us, well, that would not have
made any sense. You are right about that, and it does not make
sense to me that your organization was buying from your sister
organization in Enron the highest-priced power that was out
there on the market.
You say, well, our incentive would have been to buy the
lowest priced power. I agree, that would have been your
incentive. So then why is it that most of your purchases for
power and most of the sales from EPMI related to these two
Enron organizations? It makes no sense at all, except if you
believe these two organizations under the Enron umbrella were
trying to manipulate prices in California. That is the only
conceivable explanation for it. Give me another explanation.
Secretary White. That was not our intent, and we bought
power from other people, and we sleeved it all through EPMI, so
I don't know, because I don't have the data that is in front of
you, but I don't know if it's because we sleeved it through
EPMI that, in fact, it shows up as a purchase from them, or
whether it is just the way the data was collected, but we
bought from Aquila, we bought from Dynegy, we bought from other
players in the market to get the best price.
Senator Dorgan. I am using FERC data, and it suggests that
by far, the bulk of your purchases are from your sister
organization, and we know also from evidence that they were
charging the highest prices in the marketplace. In fact, these
strategies were wildly successful, because one megawatt of
power would be moved back and forth between organizations
within Enron, in and out of California, and then all of a
sudden the price would inflate dramatically. The wholesale
division of Enron was making wild profits here and, the fact
is, your organization was losing money.
Now, it just looks to me like these are pieces to a puzzle
that fit, and it paints a terrible picture.
Secretary White. Well, they don't fit to me, because it
doesn't make any sense that we would engage in this and lose
money on the retail side.
Senator Dorgan. But you did lose money on the retail side,
and the wholesale side was making a fortune?
Secretary White. No, we didn't lose money. If you take a
look at the financials that were reported for the year 2000,
Enron Energy Services was a profitable entity.
Now, we had lots of other businesses, and all of our income
did not come from the State of California, but we were a
profitable entity in 2000.
Senator Dorgan. Mr. Secretary, I am trying to understand
here what went on, and you know, sometimes when you see one and
one and an equals sign, and somebody writes two, you shake your
head and say, yep, that sure adds up, that makes sense, that is
what I learned. As I look at what happened here, it seems to me
that you have the smoking gun of an internal corporate strategy
document that says, here is the way our corporation is going to
benefit on the backs of West Coast consumers, and billions of
dollars were taken out of the pockets of West Coast consumers
that should not have been taken out of their pockets.
I know there are criminal investigations and litigation,
but I am just saying to you that the Attorney General of
California, the ISO, and the Public Utilities Commission all
say that your organization inflated your loads. Why did you
inflate the loads? Because it fits with the strategies we have
discovered in the smoking gun memos.
Secretary White. Well, the smoking gun memos, first of all,
were written by lawyers that worked for the Wholesale Group for
the benefit of the Wholesale Group officers. There are about
three sentences in these two memos that have to do with the
fact that we were scheduling load, the EES was scheduling load
through the wholesale enterprise. Other than that, these are
entirely wholesale memos that have to do with wholesale trading
strategies, as you pointed out, by attorneys that did not work
for the retail group, did not report to us, and consequently I
have never seen these memos until the FERC released them
several months ago.
Senator Dorgan. Well, this glove looks to me like it fits.
It is just a situation where everybody out there who is deeply
involved in investigating this says, here is the way it
happened. One part of the company facilitated the other part of
the company making a fortune.
Now, let me just show you what the profits were. These are
reported profits for EES during your tenure, and with one
exception, the fourth quarter of 1999, it was losing money.
Without the mark-to-market, by the way, in the year 2000 you
would not have been profitable. Essentially it is a fairly
unprofitable division at Enron, at least the way I look at it.
Secretary White. Well, it was a start-up business. I joined
it in April 1998. Enron had been struggling with its retail
business since 1995. We had a goal in 1999 for the business to
break even. That's the $7 million in the fourth quarter of
1999. We were profitable throughout the year 2000, and mark-to-
market--so we were a start-up business, so it's not at all
surprising, with the investments that have to be made, that we
were unprofitable in 1998 and 1999. We were profitable in the
year 2000.
Senator Dorgan. I understand, but my point about 2000 is
that this is not money you received. This is from mark-to-
market contracts for which you would receive revenue many years
in the future, so without mark-to-market you were unprofitable
throughout this.
Secretary White. And I would say also, Senator, that I
didn't invent mark-to-market. That was the standard of the
industry at the wholesale level, and so when we built a
commodity business at retail level we did not have the choice
of not using mark-to-market. It was the industry standard.
Senator Dorgan. Secretary White, let me ask you a question
I asked Mr. Skilling and I would have asked Mr. Lay. A lot of
people lost a fortune here, and you indicated yourself that--I
do not know whether the word disgusted is the appropriate word,
but you were fairly disgusted----
Secretary White. Disgusted is a good word.
Senator Dorgan.--with what you discovered went on inside
that corporation. If that is the case, then the gains that
those at the top were able to leave the corporation with, it
seems to me, are probably in many cases ill-gotten gains. Have
you given any thought to returning some of those gains that you
received during this period?
Secretary White. No, I have not.
Senator Dorgan. Why not?
Secretary White. Because I don't consider the gains for
running the business in a responsible way to be ill-gotten.
Senator Dorgan. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. Mr. White, were you
a hands-on executive who kept close tabs on what was going on
with your employees?
Secretary White. Yes.
Senator Wyden. But it is so hard to reconcile that
assertion that you were a hands-on executive with your
statement that you really know nothing about all of these
dummied-up operations.
Secretary White. I'm telling you, Senator, that I would
argue whether that is an accurate statement of what has
happened. Now, we will wait for the FERC to opine, and
Commissioner Wood was in here at your last hearing and talked
about his ongoing investigation, and I think I, along with
everybody else, eagerly awaits to see what his opinion is.
Senator Wyden. Well, I will tell you, I have learned this
morning that FERC is not even investigating your role in all of
this, and I find that very troubling. I mean, I think if you
look at what has become a matter of public record, and I
started with this several hours ago, that at a minimum we are
not prosecutors here. The Securities and Exchange Commission
and FERC should be looking at these matters, and you have told
us now for the record you have not even been contacted by them.
Now, you have said you were not aware of Enron
participating in a variety of these trading strategies that we
have been concerned about here today. Those memos identify
Enron Energy Services as a participant in the various trading
schemes. For example, your company was identified as submitting
a dummied-up load to the California independent system
operation.
Secretary White. No, I don't think that's true.
Senator Wyden. Let me just finish the question, all right,
and then you can tell me what you think is true or not, because
these are memos that have triggered my concerns.
Tell us how it can be that Enron Energy Services is
involved in submitting dummied-up load, and somehow the Vice
Chairman, the Vice Chairman who is there at the time does not
have any knowledge about it, especially given the fact you said
you were a hands-on executive.
Secretary White. Well, first let me tell you we didn't
submit anything to the ISO. What we did was, we submitted
scheduling every day. As Senator Dorgan pointed out, our
scheduler would submit to EPMI's scheduler what our load
requirements would be to serve our retail customers.
What EPMI did in terms of how it incorporated that load
into their overall trading strategy and to suit their own
purposes, there was something that was done in wholesale, and
that is precisely what the memos say the relationship was that
I'm reading. Let me read you two sentences.
Enron will submit a day-ahead schedule showing 1,000
megawatts of generation scheduled for delivery to Enron Energy
Services. Enron in this case I think it is fair to say is EPMI,
and then it goes on and says, in real time Enron sends 1,000
megawatts of generation, but Enron Energy Services only draws
500. This gets into the business of ``inc-ing'' and the
strategy of ``inc-ing''.
We, I contend, would have submitted the 500 in the first
place, and they on their side in scheduling with the ISO, if
they chose to dummy that up, as you say, or increase it for
whatever commercial purpose at wholesale level, would have done
that without input from us and without participation by us. I
think that is my fundamental point.
Senator Wyden. Well, I think we would both agree--maybe it
is one of the few things we would agree on this morning that,
this is pretty dense stuff, but it is hard to see how all of
this can go forward without a senior executive like yourself
not having a sense of what was going on.
Now, let me ask you about this economic motive question
that the Chairman and others have talked about. You were
competing with the California power market, and it seems to me
that if your competitor's prices are higher, that makes you
more competitive, so everybody wins big at Enron. The wholesale
division wins by higher wholesale prices. The retail division
wins by having lower prices than the artificially inflated
prices of your competitor. What do you disagree with?
Secretary White. Well, first of all we are competing in a
retail market, where the price of retail power is capped, and
we are providing a discount off the commodity component of that
capped retail price.
You will recall the structure of the California market had
a capped retail price that had three principal components. One
was a transition charge so that the utilities could recover
their stranded investments. Second were the line charges and so
forth, the normal regulatory charges, and third was the
commodity piece of that. We were competing in the retail market
at a discount to that commodity price in the retail market, not
as a function of whatever the wholesale price was floating to
be. We were in the retail business signing up customers.
Senator Wyden. How would it not have been good for Enron
Energy Services and for the other Enron entities to drive up
the wholesale price for energy prices paid by California?
Secretary White. I cannot pass it through to the retail
customer.
Senator Wyden. Just a moment. Would that not make the
retail power sold by your company more competitive if the
wholesale market price was inflated?
Secretary White. Why? The retail price was capped. That was
the whole problem that PG&E and SOCAL had, was that they could
not pass the cost that they were paying in the wholesale market
on to retail customers, so we're competing in a capped retail
market, and we have to compete against that capped price and
get a discount off of it, so wild fluctuations in the wholesale
price don't make any sense to us as a retail player.
Senator Wyden. Again, there are so many questions triggered
by your answers, not the least of which is the Ricochet
concept, which of course we heard about in other memos, and I
want to wrap up just with this. What would you have done
differently if you could take all of these events back? I mean,
you seem to at least--unless I am missing something this
morning, you seem to be defending everything that went on in
terms of your own role, and I think it would be useful at least
for my knowledge, what would you, looking back, have done
differently, if anything?
Secretary White. From an Enron perspective?
Senator Wyden. No, your role. I would like to know what, if
anything, you would have done. We have got all these memos
saying your employees did various things. We have got your
employees--Mr. Secretary White, your employees are saying that
you personally participated in deceptive acts. Those are news
articles that have been written all over the country. I want to
give you the chance to say what, if anything, you would have
done differently?
Secretary White. I would have never left in the first place
if I had had any idea that the fundamental economics of Enron,
when you look at the special purpose entities and the off-
balance sheet transactions that have been widely discussed,
their impact on the restatement of earnings, and everything
that has happened since the third quarter--if I had any idea
that that kind of tragedy and hardship was coming, and that my
business unit would be a part of it, I would have never left
Enron in the first place. I would have stayed and fought it out
to try and fix it.
Senator Wyden. How would you have fought it out? What would
you have done?
Secretary White. Well, starters, if I had had any idea, as
a member of the Management Committee, that the Chief Financial
Officer of the corporation had been permitted by the Board of
Directors to operate in a conflicted position, and therefore
against the Enron shareholders, and that all of these special
purpose entities that were being created off-balance sheet were
not really off-balance sheet, and that those risks would
migrate at some point to the balance sheet and ultimately
destroy the corporation, I think if that was widely known with
the Management Committee of Enron, we would have fixed it, but
it wasn't.
Senator Wyden. Tell me your assessment of these allegations
by the various employees with respect to their comments that
you were involved in deceptions, or is this just totally false?
Secretary White. I don't agree with it, because I could
bring thousands of employees into this room that worked at
Enron Energy Services that wouldn't agree with it.
Senator Wyden. Well, Mr. Chairman, I want to wrap up by
saying this is exactly the reason why several hours ago I said
that it is so important that the Securities and Exchange
Commission and the Federal Energy Regulatory Commission look
not just at Enron's activities overall, but look at Secretary
White's role, because he has just said he disagrees with his
former employees who have linked him to these deceptive acts.
That is, of course, your right. I do not challenge that at all.
But when you have a difference of opinion, and a difference
of opinion that is so stark on material matters that have been
devastating to the constituents that I and others on the West
Coast represent, that is why you have the government do its
job, and to me the fact that those two agencies, the SEC and
the Federal Energy Regulatory Commission, are sitting on the
sidelines with respect to examining Secretary White's role
raises profound questions about whether or not we are going to
have in this administration, an administration that is serious
about going after allegations of misdeeds that can affect
thousands and millions of consumers across the country.
Mr. Chairman, thank you.
Senator Dorgan. Senator Boxer.
Senator Boxer. Thank you, Mr. Chairman. You know, I want to
put together, Mr. Chairman, your chart and my chart of the
spiked prices to prove a point, which is that California was
used as a cash cow, notwithstanding anything that was said here
today, so I want to show you exactly the date. The last quarter
of that profitable year is exactly when the prices spiked, the
last quarter of that profitable year.
We were not born yesterday. California was used as a cash
cow, and I have some questions to get to that point, but I want
to close off the telephone conversations, because I want to
make sure that I restate something. There were 77 phone calls,
we believe, and meetings involved about 18 people, and the most
calls were to Mr. Hurt, who you define as a very close friend.
Secretary White. He is, and so is his wife.
Senator Boxer. Good. Three people on the list said they
were really good friends of yours, Stan Horton, Marty Sundee,
and Dan Leff. The rest of the people, including Mr. Hurt,
refused to confirm or deny that they were really close friends,
and their lawyers would not reveal whether they were close
friends or not.
Secretary White. Are you contending Mr. Hurt is not a good
friend of mine?
Senator Boxer. No. I am trying to wonder why a best
friend----
Secretary White. Would you like him to call you this
afternoon?
Senator Boxer. Sir, common sense would say to me--and I
want everyone to think about this. Think of who your best
friend is, and you are in some kind of a hot seat here, and a
U.S. Senator who is kind of trying to find the truth is calling
to find out could you confirm that so-and-so is a best friend,
your best friend, I would hope my best friend would say, you
bet, but I cannot get that answer. What I am trying to say is
what Senator Wyden and I have said several times, we are not
prosecutors.
I want the SEC to look at it. They look at Martha Stewart
for four calls. They have not looked at you for 77 calls, and I
am very frustrated at that point, and I wanted to put in the
record the three that did say that, because I did not want to
not tell the truth. I had forgotten those three had said it.
Now, California. Secretary White, I want to ask you a
couple of questions here. You have testified you knew nothing
about the accounting improprieties and energy market
manipulations while you were at EES. That is correct, is it
not?
Secretary White. What accounting improprieties?
Senator Boxer. The ones that have been in the paper.
Secretary White. Are you talking about mark-to-market
accounting?
Senator Boxer. Let us talk about hiding profits, and let us
talk about hiding losses in the big picture. Did you know
anything about that?
Secretary White. No.
Senator Boxer. Did you know anything about ``inc-ing''?
Secretary White. No.
Senator Boxer. While you were in charge of day-to-day
operations, you never heard of the term, ``inc-ing''?
Secretary White. Never.
Senator Boxer. And you never heard of the term, Fat Boy?
Secretary White. Never.
Senator Boxer. And you never heard of the term, Ricochet?
Secretary White. Never.
Senator Boxer. So you were stunned when two lawyers, one of
whom was on loan to Enron--figure this out--and prepared a
memo. You were stunned to see it after the fact?
Secretary White. I was surprised, yes.
Senator Boxer. You were not stunned?
Secretary White. Stunned that people would, if you have
capped price in the State of California and you have uncapped
prices in surrounding states, and someone, a trader would try
to arbitrize the difference in the prices of those two markets,
I do not think anybody that knows how traders operate would
find that stunning. I am surprised by it, yes.
Senator Boxer. Well, it was illegal to do this in
California, to do the Ricochet, and we have the same two
lawyers writing a later memo citing the illegalities and the
fact that Enron and EES--which is mentioned on page 2, by the
way. EES is mentioned on page 2 of the initial memo--that, in
fact, these were illegal under the rules of California.
Secretary White. The memo does not say, does not say that
Enron Energy Services did anything except submit load, submit
retail load to EPMI to be scheduled.
Senator Boxer. So you do not think that EES had anything to
do with any of these schemes in any way?
Secretary White. They were wholesale schemes. I have no
knowledge of our participation, our--let me correct that, Enron
Energy Services' participation in any of the schemes outlined
in either memo.
Senator Boxer. And you were not stunned to read them, even
though I have just told you that they were against the law in
California?
Secretary White. And if they are against the law, then I am
all for those that participated in it being prosecuted to the
full measure of the law.
Senator Boxer. And I would ask unanimous consent to place
into the record the page in which EES is specifically
mentioned, as it has to do with ``inc-ing'' part of the deal.
[The information referred to follows:]
1. ``Inc-ing'' Load Into The Real Time Market
One of the most fundamental strategies used by the traders is
referred to as ```inc-ing' load into the real time market.'' According
to one trader, this is the `oldest trick in the book' and, according to
several of the traders, it is now being used by other market
participants.
To understand this strategy, it is important to understand a little
about the ISO's real-time market.\1\ One responsibility of the ISO is
to balance generation (supply) and loads (demand) on the California
transmission system. During its real-time energy balancing function the
ISO pays/charges market participants for increasing/decreasing their
generation. The ISO pays/charges market participants under two schemes:
``instructed deviations'' and ``uninstructed deviations.'' Instructed
deviations occur when the ISO selects supplemental energy bids from
generators offering to supply energy to the market in real time in
response to ISO instructions. Market participants that increase their
generation in response to instructions (``instructed deviation'') from
the ISO are paid the ``inc'' price. Market participants that increase
their generation without an instruction from the ISO (an ``uninstructed
deviation'') are paid the ex post ``dec'' price. In real-time, the ISO
issues instructions and publishes ex post prices at ten-minute
intervals.
---------------------------------------------------------------------------
\1\ The ``real-time'' energy market is also known as the imbalance
energy market. The imbalance energy market can be further subdivided
into the (1) supplemental energy or instructed deviation market and (2)
the ex post market or uninstructed deviation market.
---------------------------------------------------------------------------
```Inc-ing load' into the real-time market'' is a strategy that
enables Enron to send excess generation to the imbalance energy market
as an uninstructed deviation. To participate in the imbalance energy
market it is necessary to have at least 1 MW of load. The reason for
this is that a generator cannot schedule energy onto the grid without
having a corresponding load. The ISO requires scheduling coordinators
to submit balanced schedules; i.e., generation must equal load. So, if
load must equal generation, how can Enron end up with excess generation
in the real-time market?
The answer is to artificially increase (``inc'') the load on the
schedule submitted to the ISO. Then, in real-time, Enron sends the
generation it scheduled, but does not take as much load as scheduled.
The ISO's meters record that Enron did not draw as much load, leaving
it with an excess amount of generation. The ISO gives Enron credit for
the excess generation and pays Enron the dec price multiplied by the
number of excess megawatts. An example will demonstrate this. Enron
will submit a day-ahead schedule showing 1000 MW of generation
scheduled for delivery to Enron Energy Services (``EES''). The ISO
receives the schedule, which says ``1000 MW of generation'' and ``1000
MW of load.'' The ISO sees that the schedule balances and, assuming
there is no congestion, schedules transmission for this transaction. In
real-time, Enron sends 1000 MW of generation, but Enron Energy Services
only draws 500 MW. The ISO's meters show that Enron made a net
contribution to the grid of 500 MW, and so the ISO pays Enron 500 times
the dec price.
The traders are able to anticipate when the dec price will be
favorable by comparing the ISO's forecasts with their own. When the
traders believe that the ISO'S forecast underestimates the expected
load, they will inc load into the real time market because they know
that the market will be short, causing a favorable movement in real-
time ex post prices. Of course, the much-criticized strategy of
California's investor-owned utilities (``IOUs'') of underscheduling
load in the day-ahead market has contributed to the real-time market
being short. The traders have learned to build such underscheduling
into their models, as well.
Two other points bear mentioning. Although Enron may have been the
first to use this strategy, others have picked up on it, too. I am told
this can be shown by looking at the ISO's real-time metering, which
shows that an excess amount of generation, over and above Enron's
contribution, is making it to the imbalance market as an uninstructed
deviation. Second, Enron has performed this service for certain other
customers for which it acts as scheduling coordinator. The customers
using this service are companies such as Powerex and Puget Sound Energy
(``PSE''), that have generation to sell, but no native California load.
Because Enron has native California load through EES, it is able to
submit a schedule incorporating the generation of a generator like
Powerex or PSE and balance the schedule with ``dummied-up'' load from
EES.
Interestingly, this strategy appears to benefit the reliability of
the ISO's grid. It is well known the California IOUs have
systematically underscheduled their load in the PXs Day-Ahead market.
By underscheduling their load into the Day-Ahead market, the IOUs have
caused the ISO to have to call on energy in real time in order to keep
the transmission system in balance. In other words, the transmission
grid is short energy. By deliberately overscheduling load, Enron has
been offsetting the ISO's real time energy deficit by supplying extra
energy that the ISO needs. Also, it should be noted that in the ex post
market Enron is a ``price taker,'' meaning that they are not submitting
bids or offers, but are just being paid the value of the energy that
the ISO needs. If the ISO did not need the energy, the dec price would
quickly drop to $0. So, the fact that Enron was getting paid for this
energy shows that the ISO needed the energy to balance the transmission
system and offset the IOU's underscheduling (if those parties own Firm
Transmission Rights (``FTR'') over the path).
Senator Boxer. I would also ask you a couple of other
questions. John Olson, an analyst, and Alexander Morrison
Harris, do you recall being asked by him in 1999 how Enron's
Energy Services, EES, a relatively small operation at the time,
could already show millions in profit, but with very little
actual business? Do you remember, you gave him a one word
answer, California?
Secretary White. No.
Senator Boxer. Do you remember him?
Secretary White. Oh, sure.
Senator Boxer. Do you ever talk to him?
Secretary White. I have talked to him on several occasions.
He was a Houston-based analyst. He was at Merrill Lynch for a
portion of his career, always covering Enron, then he moved to
the organization you just said.
Senator Boxer. So the fact that he recalls you saying there
is one word that answers the question of how we made money, and
I showed you the charts, you said California, you do not recall
that? Could you have said California?
Secretary White. I'm sorry, what year was that?
Senator Boxer. He talked to you in 1999.
Secretary White. No, I'm sorry, I don't remember the
specifics of a conversation three years ago with John Olson.
Senator Boxer. Did you in any way participate or have
knowledge of a fake trading room that EES and Enron threw
together, staffed by secretaries and other support personnel,
to appear to be an actual and active trading facility that was
thrown together apparently in hindsight, as we view it, to
simply impress visiting stock analysts?
Secretary White. What was the question, was I aware of it?
Senator Boxer. Did you participate in any way, or have
knowledge of a fake trading room that EES and Enron threw
together, staffed by secretaries and other support personnel,
to appear to be an actual and active trading facility, which
appears to have been thrown together simply to impress stock
analysts?
Secretary White. Let me tell you exactly what my
relationship was with that. First of all, I joined Enron in
April 1998. The incident that you are talking about was a part
of the analyst conference of January 1998. I had no direct hand
in the scheduling, or whatever else happened in the walk-
through of the analysts that chose to go over to the Enron
building after the meeting of the EES operation. I don't recall
what it purported to be, whether it was a trading floor or a
deal floor. I didn't set it up. I wasn't at EES at the time.
Senator Boxer. Did you ever go to it?
Secretary White. I think I walked through along with the
analysts.
Senator Boxer. And what did you think when you saw it? What
did you think it was?
Secretary White. It looked brand new.
Senator Boxer. And.
Secretary White. I don't think, if there was an issue of
credibility, that it would fool or deceive a single Enron
analyst, because the question the analysts were asking at that
time was a typical analyst's question, and that was, you've
been losing money for three years in retail, when is this thing
going to be profitable, and show us the numbers, and that is
what they were after.
Senator Boxer. OK, but I am just--just to the point of what
Senator Wyden asked you, if you could do it over, you were in
this room, you thought it was new----
Secretary White. It was new.
Senator Boxer. Did you think it was real, that real things
were happening on the floor?
Secretary White. I had no way of knowing, because I wasn't
in the business unit at the time, whether it was real or not.
Senator Boxer. And you say the analysts chose to go there.
Don't you think they were invited to go there?
Secretary White. Oh, sure they were.
Senator Boxer. You said they chose to go there, as though
they said, gee, I have nothing to do, let us go to the floor.
Secretary White. The way the analyst meetings were
conducted with Enron at that time in history was, you would
have a big conference in the morning, and you would have a wide
range of buy and sell side analysts that covered Enron. Then
there would be an optional visit to the Enron building to look
at wholesale trading and anything else that the corporation
chose to show, and some of the analysts came, and some of the
analysts didn't come. Some went and got on their planes and
left, so I don't recall how many of them attended that, or how
significant it was.
Senator Boxer. Let me just read this. Lance Dohman quoted
in Dow Jones Energy Services----
Secretary White. Who is Lance Dohman?
Senator Boxer. He writes for Dow Jones Energy Services. He
is a former trader. All the senior management was there,
meaning the floor. Jeff Skilling, Ken Lay, Lou Pai, Tom White.
Then the countdown started 30 minutes before the analysts
arrived, 15 minutes, then the analysts began walking through,
and Jeff Skilling says, gentlemen, behold, this is where we
track the deals in real time, and then he goes on to say, the
problem was, the computer was not plugged into anything, so are
you saying you were duped?
Secretary White. I walked through with everybody else.
Senator Boxer. So even though this gentleman thought you
were part of the management team----
Secretary White. I wasn't.
Senator Boxer. You were not?
Secretary White. I was not a member of the EES team that
set that up, that ran it.
Senator Boxer. But it looks as if this particular trader--
--
Secretary White. Who is Lance Dohman?
Senator Boxer. He is a trader.
Secretary White. For who?
Senator Boxer. With EES.
Secretary White. I've never heard of him.
Senator Boxer. Well, this again gets to Senator Wyden's
point. We are not prosecutors here, but he recalls you being
there, and he called you senior management, and now this has a
ring of truth to it, but let us put it down, because you do not
think it is.
Secretary White. Well, specifically, I was there. I walked
through with the analysts. I was not a participant in the
demonstration, or whatever you wanted to call, EES put on,
because I wasn't in EES at the time. I was running a different
business unit.
So I walked through, along with everybody else.
Senator Boxer. You walked through, and you associated with
the analysts, not with the corporate leaders there?
Secretary White. In other words, there were--we all walked
through together, because I was not--and they walked through
other places.
Senator Boxer. And they duped you?
Secretary White. What?
Senator Boxer. They duped you, the other corporate leaders?
Secretary White. I didn't have any evidence to track how
much of it was real or unreal, is the point. I just observed
it, like everybody else.
Senator Boxer. As the Vice Chairman for EES until May 2001,
did you have any discussions at any time with officials at
Reliant, Dynegy, Williams, CMS, while the California
electricity markets were failing during the two-year energy
crisis in California?
Secretary White. No.
Senator Boxer. So you never spoke to any other executives
from other companies?
Secretary White. About the California crisis? No.
Senator Boxer. No, not just about the California crisis.
Secretary White. Do you mean socially?
Senator Boxer. Absolutely not socially, about business in
any way?
Secretary White. No.
Senator Boxer. No contacts?
Secretary White. No.
Senator Boxer. OK. Well, let me say this. When you asked
for your extension from the original 90 days, in answering Bill
Nelson's point--because you spoke about how bad it is to have a
conflict of interest, and you criticized others for having a
conflict. You know, the reason the Armed Services Committee
wanted you to divest is because of conflict of interest, real
or perceived, and when you were questioned by Bill Nelson you
basically said, I want an extension because I believed in the
company.
Now, translate that to me, an old stockbroker. I hear the
stock is going to go up, and I think to my mind that you should
have divested within the 90 days without asking for extensions,
even if you thought the price was going up. That is just--it is
not illegal that you asked for the extension, but your
admission here today that that was--you believed in the
company, you wanted an extension. That does not give me a lot
of comfort about the way you view your job as one of the
highest officials in the military.
Secretary White. I think what I said to Senator Nelson, to
be more accurate, I asked for an extension because of my
private equity partnerships. I also believed in the company, no
question about it, and my selling pattern, the fact that I
never cashed in the options reflects that.
Senator Boxer. Well, you said two things, and I believe you
on both counts, and I am just suggesting it is my opinion that
in the kind of job that you had, instead of being busy getting
extensions--this is just an opinion, because you thought the
stock would go--unload, and you know, the truth is, you would
have been better off financially.
Secretary White. No question.
Senator Boxer. And you should have done it because it was
the right thing to do. It would have been the right thing to
do.
Well, let me just conclude here on this point. It does not
ring true to me that the man in charge of daily operations for
EES knew so little, and I would like to ask you one last
question from Senator Nelson. Do you recall refusing, when you
were at EES, to consider any federal contracts that called for
audits of Enron and EES in the contract, like the Fort Hamilton
one?
Secretary White. No, I don't recall. We had to bid to the
specification of the Government, and I am sure that in our
commercial discussions with them we tried to use the burden of
auditing and so forth, and so we might have made those
arguments, but we went ahead and signed the contract.
Senator Boxer. With the audit requirement in it?
Secretary White. Whatever the Government required.
Senator Boxer. Well, I know Senator Nelson is going to look
at this particularly at Fort Hamilton, but in any event, I want
to thank you, Mr. Chairman, because from the standpoint of
California I think we go back to connecting dots here from the
day you started this inquiry till now. All we have to do is
look at the facts, look at what people said, and what we see is
that in fact California was used as a cash cow.
There were schemes. People run away from it. They run away.
They walk into phony trading rooms, but they are honorable
people and they are high up and gee, they did not know anything
untoward was going on and they did not stay with their
counterparts, the executives. They were just duped like the
analysts. They did not even know.
And all of this, and many, many phone calls, and getting
extensions, and all of these things, I would say to you,
Secretary White, just make me feel uncomfortable and upset, and
from the standpoint of the people of California, I think you
did say--and we will close on this, what Mr. Olson said. I did
not believe Mr. White or any of the other Enron executives I
spoke with were being honest or forthcoming about EES' profits.
When I pressed Mr. White for an answer he said one word,
California.
And you know what, who could make that up? That is
something you would remember.
Secretary White. I don't remember it.
Senator Boxer. If somebody asked you about your profits,
you would say, well, we have got a good strategy. We have
looked at a long-term plan. Look at our annual report, look at
our vision. One word, California. Jeffrey Skilling said the
same thing in a little other word. Jeffrey Skilling said, when
California's problems were solved, we went under.
I believe, Secretary White, that there was a scheme to bilk
our people to make EES profits. I will believe it forever. I do
not agree with you. I do not think you are credible on the
point. I do not think that what you did while we were under
siege was right. It is my opinion. We just differ.
Secretary White. We do.
Senator Boxer. Thank you very much.
Senator Dorgan. Senator Boxer, thank you. These issues are
going to be resolved sooner or later. We have multiple
investigations occurring, and they will be resolved.
Let me mention that in the earlier part of the hearing this
morning we had invited the Chamber of Commerce to present
testimony on corporate governance. We invited Felix Rohatyn. By
consent, I will put a submission by Felix Rohatyn in the record
on corporate governance.
[The information referred to follows:]
Prepared Statement of Felix G. Rohatyn, Rohatyn Associates LLC
Rohatyn Associates LLC
New York, NY, July 15, 2002
Hon. Byron Dorgan,
U.S. Senate,
Washington, DC.
Dear Chairman Dorgan:
Thank you for inviting me to testify before the Senate Committee on
Commerce, Science and Transportation, Subcommittee on Consumer Affairs,
at the hearing on improving corporate responsibility.
I regret that I am unable to attend the hearing but I would like to
submit for the record an editorial that presents my ideas for corporate
reform; it appeared in The Wall Street Journal on June 24, 2002.
I appreciate your leadership on this important issue and look
forward to working with you in the future.
Sincerely,
Felix G. Rohatyn
Enclosure
______
An Agenda For Corporate Reform
The Wall Street Journal, June 24, 2002
By Felix G. Rohatyn
As scandals from Merrill Lynch to Andersen and Enron make clear, in
the past few years the most fundamental principles of our market system
were being flouted: full disclosure, strong corporate governance,
strong ethical standards. Congress, the Securities and Exchange
Commission and various other organizations are now taking corrective
measures to clean up the market mess. The steps being taken now are
positive, but we should consider additional changes in a few other
areas.
Start with the role of corporate directors. Most of them are
supposed to be independent of the company. The reality of the
nominating process, however, dictates that directors are chosen by the
management and the existing board, and ratified by the shareholders in
a vote that is, most frequently, pro forma. It is quite normal that
outside directors, even if financially independent of the corporation,
are loath to challenge the management on issues such as compensation in
order not to disturb the cohesion of the board. Having served on a
number of boards, I have fully participated in that process.
But it would be healthy to provide for a cadre of truly independent
directors, professionally qualified and really nominated by
shareholders. This could be accomplished if large institutional
stockholders, in particular the public pension funds, owners of a
majority of U.S. equities, put up their own candidates for a number of
boards. One such director per board would suffice.
The nominees could be selected from a list of qualified former
executives and academics, who would limit their directorships to no
more than two or three companies, and would see this as a full-time,
well-paid activity. They could be provided with staff support by the
institution, as well as additional compensation by a fund set up the
institutions collectively. Total compensation for such a cadre could
range between $250,000 and $350,000 per year.
Up to now, the larger pension funds have been reluctant to get this
deeply involved in corporate governance; if they are unhappy with
performance, they simply sell. However, the California Public
Employees' Retirement System (Calpers) recently announced that it would
vote against reappointing auditors at companies including Exxon Mobil,
Home Depot and McDonald's because they pay accountants for non-audit
services. Calpers will also vote against directors who are member of
audit committees that approved using auditors for consulting services.
The logical continuation of this trend would be for the pension funds
to nominate their own directors. It's in their interest to do so; after
all, the collapse of Enron cost public pension funds about $3 billion.
One of the first priorities for independent directors should be to
prohibit auditors from doing consulting work. Even if it's impossible
to get this proposal written into legislation because of the political
power of the accounting industry, boards of directors can make this
sensible move on their own. Pension funds like Calpers should press
them to do so.
The second major area of reform concerns banks. Since the repeal of
the Glass-Steagall Act in 1999, banks have entered the investment
banking business. They are making use of their vast financial muscle to
perform numerous functions for their corporate clients, which often
create serious conflicts of interest. It is not healthy to be a
company's financial advisor for a sale or merger, while simultaneously
representing buyers of assets to be sold; to be lender to a company
while underwriting a sale of its securities to pay down the debt; or to
be an agent in its foreign exchange or derivatives trades while being a
principal as its counterparty.
Yet such conflicts-of-interest are rampant because we have gone too
far in a deregulatory direction. While re-enacting Glass-Steagall is a
non-starter, greater vigilance on the part of the regulators, as well
as the boards of directors, should be devoted to these conflict issues.
The securities industry and its regulators must police the behavior
of investment houses and their analysts. When a reputable firm allows
its analysts to make recommendations that they know to be false, that
is more serious than a simple conflict-of-interest. Research and
advisory services are there to protect the investors, not to generate
investment-banking fees. Any deviation from that commitment must result
in harsh punishment, both to the firm and to the analyst. The notion
that independent research firms cannot survive economically is not
necessarily true. There are examples now such as Value Line, and the
large institutional investors could certainly accelerate the process.
The third and final area of reform concerns stock options. I recall
serving on corporate boards in the 1980s when the pressure coming from
institutional investors to align management interests with shareholder
interests led to large-scale compensation restructurings away from cash
and in favor of options. The use of options was, in many cases, abused;
accounting for options did not truly reflect the cost to the company;
and the options failed to align management with the shareholders
because they eliminated any risk to the holders of the options.
It's time to consider simple stock grants in lieu of options. The
recipients would be at risk from the day of the grant; thus their
interests would be aligned with the shareholders. The stock could not
be sold until some time after the executive had left the company; a
change would be required from the Internal Revenue Service to defer the
tax on the grant until the sale of the shares. If this change were not
obtainable, provision could be made for the companies to assist their
executives in borrowing the amount of the tax until the sale of the
shares. The accounting for such a change would be straightforward: The
value of the stock grants would be charged to the company's income in
the year of the grant, reflecting the reality of the situation.
Such a policy change should probably be accompanied by a greater
proportion of compensation in cash (salary and bonus) tied to
performance. The principle of ownership, instead of options, is the
only way to truly align the interests of management with those of
shareholders.
Of course, ultimately rules are no substitute for ethics. I believe
that our corporate world and our financial markets will ultimately
reward ethical behavior--and (as we are now seeing) punish those who
are guilty of questionable practices. Ethics will turn out to be more
than a moral imperative; it will turn out to be good business. It will
sell at a premium.
Mr. Rohatyn is a former managing director of Lazard Freres and a
former U.S. ambassador to France.
Senator Dorgan. Secretary White, let me conclude by making
this comment. We have had Mr. Lay come to this Committee. He
asserted his Fifth Amendment rights not to testify. Mr.
Skilling came and testified at great length. He told us that he
really was unaware of any of the issues that had been raised,
and I am talking there now about issues that have been raised
by the investigation done by the Board of Directors in which
they said that the Enron Corporation booked $1 billion of
profits that it did not earn.
That is what they told America. Here is $1 billion in one
year that it really did not earn, and it had debt that it kept
off the books, so the Board of Directors themselves said that
what went on inside the corporation was, ``appalling''.
You can well understand, then, with Mr. Skilling coming
before the Committee and speaking for a great length of time
and saying, you know, I really had nothing to do with any of
this, I was not aware of it, it all happened somewhere else, on
somebody else's watch, that those of us who, on behalf of
employees and stockholders who lost a great deal of money, are
trying to determine accountability. One North Dakotan who
worked for Enron, one of the pipeline companies, he said, look,
it is my fault. I put all of my 401(k) in Enron stock. It is my
fault.
But he said, I was told by things that were sent out by the
company, you should do this, believe in this company, bet on
this company, invest in this company, we are going to grow, we
are going to be bigger and better, so he said, I did. I put it
all in Enron stock, and it was $330,000, and now it is $1,700.
He said, Mr. Senator, that is my life savings, and it is gone.
So the point I make to you is there has to be
accountability somewhere. It was not with Mr. Lay, it was not
with Mr. Skilling. You indicate to us that you had no knowledge
of what was going on with respect to the marketing practices
dealing with West Coast energy. I, frankly, do not know what
the truth is, because you know, there is so much contradictory
evidence.
I do know this: a lot of people made a lot of money, and a
lot of people lost their life savings, and that is a true
tragedy. I do not think it happened because normal market
forces just caused this to happen. I think there were people
who were involved in this that were breaking the law, that were
breaking nearly every covenant of honesty and respect that one
should have for those who run corporations, and we need to find
out exactly who they are. I hope they will do more than just a
couple of years of hard tennis at some minimum security
institution. My expectation is there ought to be real
punishment for people who do this.
Now, you have testified at some length today. I wanted the
record to reflect, because of Senator Smith's point, that you
came when we invited. There was never a question that you were
not going to come, and there was never a question you were
going to assert your Fifth Amendment rights. We appreciate your
testimony today.
I must say that it does not shine much additional light for
me, because I think there are still so many unanswered
questions that apparently will have to be answered in the
context of the many investigations that continue. My hope is
that the federal regulators, in addition to the California
Attorney General and the ISO's and others, will get active
here. I worry very much that there are federal regulators who
came to government not wanting very much to regulate; that is a
terrible disservice to the American people, especially at a
time like this.
But there will be more on this issue, and on the issues
surrounding some of the other scandals that exist. I expect
that our Committee and others will have additional hearings,
but for now, Mr. Secretary, we appreciate your appearance.
Thank you for being here.
This hearing is adjourned.
[Whereupon, at 1:25 p.m., the Committee adjourned.]