[Senate Hearing 107-1141]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1141
COLLAPSE OF THE ENRON CORPORATION
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 26, 2002
__________
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Transportation
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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, Ranking
JOHN D. ROCKEFELLER IV, West Republican
Virginia TED STEVENS, Alaska
JOHN F. KERRY, Massachusetts CONRAD BURNS, Montana
JOHN B. BREAUX, Louisiana TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
RON WYDEN, Oregon OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia SAM BROWNBACK, Kansas
BARBARA BOXER, California GORDON SMITH, Oregon
JOHN EDWARDS, North Carolina PETER G. FITZGERALD, Illinois
JEAN CARNAHAN, Missouri JOHN ENSIGN, Nevada
BILL NELSON, Florida GEORGE ALLEN, Virginia
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
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Page
Hearing held on February 26, 2002................................ 1
Statement of Senator Allen....................................... 9
Statement of Senator Boxer....................................... 8
Statement of Senator Breaux...................................... 7
Statement of Senator Burns....................................... 6
Prepared statement........................................... 6
Statement of Senator Carnahan.................................... 7
Statement of Senator Cleland..................................... 5
Statement of Senator Dorgan...................................... 1
Statement of Senator Fitzgerald.................................. 3
Prepared statement........................................... 4
Statement of Senator Hutchison................................... 53
Statement of Senator McCain...................................... 2
Statement of Senator Nelson...................................... 17
Statement of Senator Rockefeller................................. 9
Prepared statement........................................... 10
Statement of Senator Snowe....................................... 16
Prepared statement........................................... 16
Statement of Senator Wyden....................................... 5
Witnesses
McMahon, Jeffrey, President and Chief Operating Officer, Enron
Corporation.................................................... 14
Prepared statement.......................................... 15
Skilling, Jeffrey, former Chief Executive Officer, Enron
Corporation,
accompanied by Bruce Hiler, Esq., O'Melveny & Myers............ 18
Watkins, Sherron, Vice President of Corporate Development, Enron
Corporation, accompanied by Philip Hilder, Esq................. 10
Prepared statement.......................................... 13
COLLAPSE OF THE ENRON CORPORATION
----------
TUESDAY, FEBRUARY 26, 2002
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m. in room
SD-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. I call the hearing to order. We would ask
for order in the hearing room.
This morning the Committee continues its examination of
what has happened with respect to the Enron Corporation. We
have had two previous hearings. Previously, we heard from a
number of Enron employees, retirees, and investors, many of
whom lost their life savings when this corporation collapsed.
Today, we hope to begin the process of hearing from some of
those who worked inside the Enron Corporation. We will hear
from Ms. Sherron Watkins. She is the employee who wrote the
memo to Mr. Lay last August saying that Enron was in danger of
imploding ``in a wave of accounting scandals.'' She continues
to be employed by the Enron Corporation.
We also will hear from Mr. McMahon. Mr. McMahon is the
former Treasurer of the Enron Corporation and now serves as
President and Chief Operating Officer. Finally, we will hear
from Mr. Skilling who is a former CEO of Enron.
Some 10 weeks ago, as we began the inquiry, Ms. Janice
Farmer sat at our witness table. She was an Enron employee and
told us how the bankruptcy of Enron had demolished her life
savings. This is a case of America's largest corporate
bankruptcy. It is not unusual that, in our system, or in our
society, enterprises would file for bankruptcy. It is unusual
that we have had a corporation file for bankruptcy and a
subsequent investigation, called the Powers Report, launched by
the Board of Directors of that corporation, saying what they
found inside the corporation was ``appalling.''
It is also the case that the people at the top in this
corporation, officers and members of the Board of Directors,
made a substantial amount of money, tens of millions of dollars
in some cases, while people at the bottom, employees and
investors, lost their life savings in many instances.
The question here is what happened? How did it happen? Who
was responsible for it happening? And what can we do to prevent
this sort of thing from happening again?
I have said previously--and let me mention again how
important this is--the method by which we accumulate capital in
this country is to have an investor in Bismarck, North Dakota,
or anywhere in the country for that matter, buy a share of
stock based on the belief that the financial statement
represented by that corporation and approved by its accountants
is a fair and honest representation of what is happening inside
that corporation.
If that trust is broken--and I believe that it was in this
situation--when that trust is broken, it undermines the method
by which we accumulate capital for our system of capitalism. I
think we must find out what happened. Where were the
accountants? Where was the law firm? Where were the security
analysts? Where were the officers and directors of the company?
And how do we prevent this sort of thing from happening again?
It is my hope, following recognition of the Ranking Member
of the Full Committee and Subcommittee, that we could limit
opening statements to a minute or so for those who have opening
statements and then go right to the witnesses. We do have a
vote that will occur at 10 o'clock. It is my intention that we
would break for 15 minutes during that vote and then come back
and proceed.
Let me call on Senator McCain for his opening statement.
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
Senator McCain. Thank you, Senator Dorgan, for chairing
this hearing, and I thank the witnesses for appearing before us
today.
Enron has drawn an enormous level of public and
Congressional interest because the story of this one company
challenges fundamental assumptions about our economic system.
One such assumption is that the public receives accurate
assessments of a company's financial health and that they rely
on this information to make rational investment decisions.
Enron's collapse raises serious doubts about whether existing
financial disclosure rules and accounting standards enable the
public to get an accurate or even a rough idea about companies'
true financial condition.
Another assumption is that there are adequate gatekeepers
in place to filter financial information and ensure its
integrity. Enron has proven this assumption wrong. Gatekeepers
within the company failed, external gatekeepers in the form of
auditors and financial analysts failed, and Congress failed.
Enron's bankruptcy dramatically illustrates that the
corporate interests and public interests cannot be assumed to
be the same. Enron has given all of us a costly lesson in
showing that we cannot rely on a system that lacks adequate
regulation and that depends solely on conscience and good
judgment.
I hope our witnesses are able to explain to this Committee
what went so terribly wrong with Enron and what you would have
done or would have us do differently to ensure this story is
not repeated.
Thank you.
Senator Dorgan. Senator McCain, thank you very much.
Before I call on the Ranking Member of the Consumer Affairs
Subcommittee, let me say that there are more than eight Members
present and Sherron Watkins has requested the Committee issue a
friendly subpoena compelling her testimony before the Committee
today. I would move that the Chairman be authorized to issue a
subpoena on behalf of the Committee. All those in favor say
aye.
[A chorus of ayes].
Senator Dorgan. Opposed, no.
[No response].
Senator Dorgan. The motion is agreed to.
Let me call on Senator Fitzgerald.
STATEMENT OF HON. PETER G. FITZGERALD,
U.S. SENATOR FROM ILLINOIS
Senator Fitzgerald. Thank you, Mr. Chairman.
Ms. Watkins, Mr. McMahon, thank you for being here today.
Mr. Skilling, I want to thank you very much for appearing
and agreeing to testify. Some of your Enron colleagues who were
also asked to testify have made a different choice. Watching
them, I have to believe that you are aware that your voluntary
appearance before this Committee entails a measure of risk and
that you therefore must be somewhat anxious. Consequently,
whatever role you may have played in the collapse of Enron, I
think there is at least something to be said for your
willingness to talk about what happened to your company.
I do, however, approach your testimony with some
skepticism. Appearing before the House, you disclaimed
responsibility. That disclaimer encouraged the perception that
Mr. Andrew Fastow played perhaps the pivotal role in the
collapse of the company. But if the theory is that Fastow went
rogue somewhere deep in the jungles of Enron and was the
assault agent of the apocalypse, I just do not buy it.
As Senators, we are intensely interested not just in
individual responsibility, but also in what appears to have
been a systemic collapse of controls, a spectacular corporate
implosion--and the collapse of controls occured both within the
company at all levels of risk management and external to the
company, as Senators McCain and Dorgan have already indicated.
We also saw the collapse of controls outside the
corporation, whether by the rating agencies, the auditing
firms, the law firms, the analysts, and even at the end of the
day, the SEC.
Our purpose then is to figure out how JEDIs, LJMs, Raptors,
and a Chewco turned the whole world on its head. We have a
chess game here, Mr. Skilling, and the challenge is to find a
way to check every single one of the moves you made on that
Enron Board.
As part of that effort, this Committee thought it important
to ask both you and Mr. Lay, as central figures in this drama,
to tell us what you know.
Now, Mr. Skilling, we are witnessing a tale of two CEOs. As
you may know, your predecessor and successor, Mr. Lay, chose
not to speak. Mr. Lay walked away. But that was only one
possible choice. You have chosen differently and this Committee
is pleased that the Fifth Amendment flu has not claimed another
victim. Your willingness to testify is appreciated and I am
sure there are many advising you to remain silent.
Mr. Skilling, I think there may be a great deal you can
tell us about your days at Enron that would both help this
Committee and this country. I look forward to your testimony.
Senator Dorgan. Senator Fitzgerald, thank you very much.
For those of you who have just arrived, I had asked that if
we could perhaps, for those who do have opening statements,
limit them to a minute so that we can begin the testimony. We
had rather good opening statements when Mr. Lay appeared.
Senator Fitzgerald. Mr. Chairman, could I get permission or
consent of the Committee to enter my full statement in the
record, as I abbreviated it somewhat?
Senator Dorgan. Without objection.
[The prepared statement of Senator Fitzgerald follows:]
Prepared Statement of Hon. Peter G. Fitzgerald
U.S. Senator from Illinois
Mr. Skilling, I want to thank you very much for appearing and
agreeing to testify today. Some of your Enron colleagues who were also
asked to testify have made a different choice. Watching them, I have to
believe that you are aware that your voluntary appearance before this
committee entails a measure of risk and that you therefore must be
somewhat anxious. Consequently, whatever your role may have been in the
collapse of Enron, I think there is at least something to be said for
your willingness to talk about what happened to your company.
I do, however, approach your testimony with some skepticism.
Appearing before the House, you disclaimed responsibility. That
disclaimer encouraged the perception that Mr. Andrew Fastow played
perhaps the pivotal role in the collapse of the company. But if the
theory is that Fastow went rogue somewhere deep in the jungles of
Enron--and was the sole agent of the apocalypse--I just don't buy it.
As Senators, we are intensely interested not just in individual
responsibility, but also in what appears to have been a systemic
collapse of controls--a spectacular corporate implosion. It's a
collapse that appears to have been both intra- and inter-institutional.
Within Enron itself, we see a fundamental collapse of control beginning
with the employees explicitly charged with managing Enron's many off-
the-books partnerships. We see a collapse of control at the level of
top management--including the Chairman and the CEO--charged with
overseeing the employees managing the partnerships. We see a collapse
of control by the Board of Directors charged with monitoring the
performance of the Chairman and CEO who are, in turn, charged with
monitoring the performance of the employees monitoring the performance
of these partnerships. That's just within the confines of Enron itself.
Then we see a collapse of controls at a macro level--by the very
institutions that are supposed to ensure the integrity of the capital
markets. The United States has a whole industry--the accounting
industry--to audit publicly traded corporations. Enron busted through
the auditors. Investment and lending institutions played a role as
well, improvidently extending capital and credit for ventures they
apparently didn't understand and about which they failed to ask
pertinent questions. Enron busted through the banks. Stock analysts are
supposed to monitor the direction of the companies they follow and warn
investors of potential pitfalls. Enron busted through the analysts.
Rating agencies play a critical role in evaluating the financial
condition of publicly traded companies and in warning investors of
negative trends. Enron busted through the agencies. Finally, we have a
Securities Exchange Commission, which polices the financial markets and
protects investors. Apparently, not even the SEC could stop an Enron.
Our purpose, then, is to figure out how JEDIs, LJMs, Raptors and a
Chewco turned a whole world on its head. We have a chess game here, Mr.
Skilling, and our challenge is to find a way to check every single one
of the moves you made on that Enron board. As part of that effort, this
Committee thought it important to ask both you and Mr. Lay, as central
figures in this drama, to tell us what you know.
Now, Mr. Skilling, we are witnessing a tale of two CEOs. As you may
know, your predecessor--and successor--Mr. Lay, chose not to speak. Mr.
Lay walked away. But that was only one possible choice. You have chosen
differently, and this committee is pleased that the Fifth Amendment flu
hasn't claimed another victim. Your willingness to testify is
appreciated when I'm sure there are many advising you to remain silent.
Mr. Skilling, I think there may be a great deal you can tell us
about your days at Enron that would help both this committee and the
country. I look forward to your testimony.
Senator Dorgan. Senator Wyden.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman.
I think it particularly important this morning that we
examine the relationship between Mr. McMahon and Mr. Fastow. I
would like to just go through the list of people that say that
Mr. Skilling knew or was warned about the partnerships that
were managed by Mr. Fastow. Mr. McMahon has said he complained
personally to Mr. Skilling about his concerns with the Fastow
partnerships. According to Ms. Watkins, J. Clifford Baxter told
her that he had met with Mr. Skilling repeatedly to express his
concerns about the partnerships. In an interview with the law
firm Vinson & Elkins, Enron's Chief Risk Officer said that he
talked to Mr. Skilling as far back as 2000 about the mounting
risks of the Raptor partnerships. Ken Lay told internal
investigators that Mr. Skilling knew the details of many of the
key partnerships and even presented the idea for one of them to
the Board of Directors. The Powers Report states that Mr.
Skilling, Ken Lay, and the rest of the Board agreed and
understood, and Mr. Skilling was the senior member of
management responsible for the LJM partnership, and Mr.
Skilling certainly knew or should have known the magnitude and
the risks associated with these transactions.
It is clear that there was a long record of individuals
right at the center of the company who were saying that you,
Mr. Skilling, were aware of this. I think what I want to
examine, because you have said that you have done nothing wrong
and that you did not know about much of this, is really how
many warnings would have been needed in order to have you take
seriously the threats that so many around you were talking
about. I hope we will get to examine that and other issues.
Thank you for the chance to make this statement.
Senator Dorgan. Senator Cleland.
STATEMENT OF HON. MAX CLELAND,
U.S. SENATOR FROM GEORGIA
Senator Cleland. Mr. Skilling and those of you who are
willing to testify today, thank you for appearing before us. I
might say, I am sure this is an unreal feeling for you, an
unreal experience. In many ways it is an unreal experience for
me. I just want you to know where I am coming from. My state,
particularly the 262,000 teachers and the well over 100,000
retired state employees, lost $127 million, Mr. Skilling, due
to the failures, I think, of leadership and openness and in
effect the lying, cheating, and stealing of the top officials
of Enron.
I will be asking questions today, not so much on my behalf,
but on behalf of the teachers, the retired employees, and the
people in Georgia who worked for Enron, who believed in you and
your leadership team, many of whom have had to declare personal
bankruptcy because your company went bankrupt due to the
bankrupt leadership of that company.
Thank you, Mr. Chairman.
Senator Dorgan. Senator Burns.
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Mr. Chairman, I will just submit my
statement for the full record. I want to thank the executives
for appearing here today. I appreciate that very much, and the
willingness to answer some of the questions that will be asked
by this panel.
I still think we are boiling down to answer the three W's:
not only what, but when it was apparent that we had really
serious internal problems, and why the management acted as they
did. Also I believe we are here to listen and make judgment,
was it the failure of the laws that are in place now and what
we should do from here on. I will tell you, no matter what
happens after this, all the problems that harmed the retirement
funds, investors, and employees, will not suddenly be gone
after these hearings are over or after the dust has settled
from the Enron collapse.
I think it is incumbent on us to take the information
gained here and more information from the agencies that were
involved in the enforcement of those regulations to do what is
necessary to protect the American people. I think our system is
at stake here and that it is up to us to make sure that it
works in case this happens again.
Now, I know how the panel that is before us today feels
this morning. I went stone broke once, too. But I did not have
as many moving parts as it appears that this case might have
had. But nonetheless, I believe that we have to take and judge
from what we gather today and prevent that the protection of
the system is in place and the confidence is restored in the
American system, which has served more people in this country
than any other system that has ever been invented on this
planet.
Thank you very much, Mr. Chairman.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns,
U.S. Senator from Montana
Thank you Mr. Chairman for holding this hearing. I welcome our
three witnesses and I look forward to their testimony today. I have a
few brief remarks I would like to offer for the record.
As in our previous hearings, I am hopeful that the information
offered today can further enlighten this committee and the American
people of the events that led to Enron's collapse. I am hopeful we can
answer to the 4 Ws. Not only What, but When it was apparent that there
were these internal problems, Why management acted they way they did,
and Who were the principals. I believe we should be here to listen and
be prepared to act based on the information collected and on the facts
as they are known.
As I have stated before, Congress is tasked with a responsibility
to the American people. We are not here to judge or convict but we are
here to ensure the American people that when a circumstance such as
this, the folks that are at the helm do the right thing and that is
protect those who have little to control the situation or have the
ability to protect themselves. I consider this an extremely important
task as our Nation's economy and the basic principles of capitalism
have been jeopardized by the Enron collapse.
We must find out which rules were bent or broken along the way, and
the rules that should have been in place but did not exist. Once these
important questions have been answered, we can address policy concerns
at the SEC, FASB and other agencies with jurisdiction, or ultimately,
Congress. In short, Congress WILL take action to make sure this
collapse and the ramification can be prevented.
In conclusion, I believe that it is important to remember we cannot
legislate morality, that is something we expect of all Americans
regardless of whether they are powerful corporate executives or blue
collar workers working to put food on their family's table. In this
case it is evident we can write out an extensive list of people to
blame and Enron's employees won't suddenly have a solid future. Private
investors won't magically see their stock gain value. Retirees' 401(k)
plans won't suddenly re-appear. I don't think it is out of line to ask
the important question of what now? What are Enron's plans for break-up
and their actions and plans for former and present employees who lost
so much. I believe we need to constantly remind ourselves that this is
not about Enron executives, this is about the Nation's economy and
investor confidence.
Senator Dorgan. Senator Breaux.
STATEMENT OF HON. JOHN B. BREAUX,
U.S. SENATOR FROM LOUISIANA
Senator Breaux. Just very briefly, Mr. Chairman, thank you.
I think when you have a bad event, a lot of times there is
a tendency for the people who surround the bad event to all
say: I do not know how it happened, I do not know when it
happened, and I do not know why it happened; it just happened.
Well, things do not just happen.
There are reasons for things that are bad--how they occur,
when they occur, and why they occur. I think it is important
for this Committee to really find out what happened, to find
out what the Federal role is in seeing that the laws that
protect the American people are, in fact, the right laws, and
if they need to be changed, that we do our very best to make
sure that they are, in fact, changed. That is what we are
trying to find out.
There are other venues for other activities surrounding
this situation, but we need to know what happened and how and
where and why.
Thank you.
Senator Dorgan. Senator Carnahan.
STATEMENT OF HON. JEAN CARNAHAN,
U.S. SENATOR FROM MISSOURI
Senator Carnahan. Thank you, Mr. Chairman.
This Committee has an extraordinary opportunity today. The
three who have agreed to testify can help us unravel the
tangled events that ensnared Enron. As top executives, they
should have been able to give a reasonable explanation of why
America's seventh largest company collapsed in a wave of
accounting scandals, as predicted by one of these witnesses.
Each of these witnesses has testified already before the
House. Their testimony on different days presented conflicting
accounts, and we did not receive a true picture. Today, these
witnesses have a duty to explain what they knew and how they
responded to what they knew.
I realize the painstaking work of investigating Enron's
collapse and the accountability will fall to others--the
Securities and Exchange Commission, the Justice Department, the
the Federal courts--but the job of this Committee is also
important. Congress is responsible for crafting the laws that
govern our financial markets and overseeing the enforcement of
these laws by the Executive Branch. But, Members of Congress
also serve as representatives of the people of this nation, and
they want to know why this happened.
They want to know if it is happening elsewhere, and they
want to know if it will happen again. It is in the public
interest to know why jobs were lost, why savings evaporated,
and why confidence was shattered.
Mr. Skilling, if you plan to tell this Committee that you
did not understand Enron's true financial condition, then you
will need to explain why, why you failed to understand things
that any diligent CEO would have understood. If you insist that
you were unaware of the company's financial condition, then I
hope that you are prepared to explain why you portrayed
yourself as someone who did.
I look forward to hearing from each of the witnesses today,
and I thank them for agreeing to testify. I hope you have come
here today armed only with the truth and ready to bear that
burden for us with a sincere heart. Thank you.
Senator Dorgan. Senator Boxer.
STATEMENT OF HON. BARBARA BOXER,
U.S. SENATOR FROM CALIFORNIA
Senator Boxer. Thank you, Mr. Chairman, for your leadership
on this issue.
Mr. Skilling, when it is my turn to question I am going to
talk about the energy crisis that California experienced. Just
to give you a little heads up of the line of my questioning, I
want to tell you a little bit about the story that is beginning
to emerge to Californians, the way we are seeing this crisis.
This is how we see it. We see that Enron got out from
governmental oversight at both the state and Federal level, and
worked very aggressively to get out from under that oversight.
The sole exception was the Federal Energy Regulatory
Commission.
Mr. Chairman, I have asked them, the FERC, to give us a
list of meetings that they have had with Enron. They put
together a list from their recollection, and we see that there
are 25 meetings in the period of time in which Californians
were desperate for them to act. I am going to question you
about this aggressive lobbying with FERC decisionmakers.
We also hear from Enron traders--that is t-r-a-d-e-r-s--
that Enron jammed transmission lines, used futures and
derivatives to, according to California State Senator Joe Dunn,
possibly buy and sell the same electricity 15 times, in an
effort to inflate prices.
As you answer these questions, I hope that you will realize
that at the time you were making jokes about California, we
were realizing that energy is a necessity, not a luxury, and we
were worried, Mr. Skilling, in the summer that elderly people
in the inland parts of my state might lose their air
conditioning and literally face death. The agriculture industry
in my state was fearful that loss of refrigeration would cause
economic devastation. Silicon Valley put solving the energy
crisis as its number one priority in order to keep the
information economy flowing. In the winter months, as we still
were getting no relief from FERC, we feared that freezing
temperatures would harm our people, particularly the elderly
and frail.
From everything I can put together, Mr. Skilling, you
helped cause these anxieties while you laughed about it. The
people of California were not laughing then. They are not
laughing now. Our state wants justice, and I hope that today
maybe we can get on that path to justice.
Thank you.
Senator Dorgan. Senator Allen.
STATEMENT OF HON. GEORGE ALLEN,
U.S. SENATOR FROM VIRGINIA
Senator Allen. Thank you, Mr. Chairman.
I agree with Senator Breaux's view. Whether anybody was
deliberate and willful in their deceit and fraud, or simply
negligent will be determined not in this Committee, but rather
in a criminal or civil proceeding in the courts. The larger
issue is that there are many people who lost much of their
investments, such as savings for their children's college
education or their retirement, because they believed that Enron
was a sound investment. That is the larger issue here because
it is a matter of confidence for the American people as to the
reliability and the credibility of the information about the
company's financial condition. They need a clear and fully
accurate description of assets and liabilities, cash-flow, true
revenues, and true costs and obligations.
Mr. Chairman, a reliable accounting system is the linchpin
of our free market system. This is not just about individual
investors. It relates to the retirement systems in various
companies, various state organizations, as well as even
investment advisers who were misled as to the actual economic
viability of Enron.
I appreciate Ms. Watkins, Mr. Skilling, and Mr. McMahon
coming here today. I hope that in the midst of all this, our
witnesses will tell us what they believe could have and should
have been done differently to have prevented the chicanery and
deceit that robbed so many investors of their savings. We need
to learn from this so that we can make changes in laws that
would be appropriate and practical to make sure that investors
and their advisers have full access to information about
companies. That should be the goal of this Committee: To learn
what went wrong and how it can be prevented in the future.
I thank these witnesses here for hopefully sharing with us
what they think can be done, because this is about more than
Enron in the views of most people in this country. Hopefully,
there will be remedies. But we need to move forward to make
sure that something like this cannot happen again.
Thank you, Mr. Chairman.
Senator Dorgan. Senator Rockefeller.
STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. Mr. Chairman, I will put my statement
in the record and note also that I strongly associate my views
with those expressed by Senator Carnahan, Senator Burns, and
Senator Allen.
Thank you.
[The prepared statement of Senator Rockefeller follows:]
Prepared Statement of Hon. John D. Rockefeller IV,
U.S. Senator from West Virginia
Thank you, Mr. Chairman, for holding this hearing. I will not offer
an opening statement, except to say that I hope we all realize the
primary reason we should be conducting this inquiry is to make sure
that the types of things that happened to the employees, retirees, and
investors of Enron do not happen to anyone else whose life's savings
are invested in a major corporation.
This is not about partisanship, and it is not about which Member of
Congress took campaign contributions from which company or which
executive. This is very simply an investigation that is most relevant
as a cautionary tale. Like all Americans, we should be angry about what
Enron did, but let's dedicate ourselves to conducting an investigation
the intent of which is to prevent this from happening again.
Senator Dorgan. Let me observe that this is the Congress,
and not a criminal justice system proceeding. It is not a
prosecution; it is a search for the truth in a congressional
hearing. Those are very different approaches. We have three
people to testify today who have testified previously on
different occasions, and we have heard three very different
stories about what happened inside the Enron Corporation. I
welcome the opportunity to take the testimony today from these
three:
Ms. Sherron Watkins, Vice President of Corporate
Development, Enron Corporation; Mr. Jeffrey McMahon, President
and Chief Operating Officer, Enron Corporation; and Mr. Jeffrey
Skilling, former Chief Executive Officer of the Enron
Corporation.
The witnesses know that it is our intention to take
testimony today under oath. If there are no objections to that,
by the rules of this Committee, you are also advised that you
are entitled to be advised by counsel during your testimony. I
would ask that when I call on you to begin your testimony that
you identify your counsel for us.
I would like, if we could, to have the three witnesses rise
and raise your right hand, and I will give you the oath:
Do you swear that the testimony you are about to give is
the truth, the whole truth, and nothing but the truth?
Ms. Watkins. I do.
Mr. Skilling. I do.
Mr. McMahon. I do.
Senator Dorgan. You may be seated. You are under oath and
recognized for opening remarks.
We will begin the opening remarks with Ms. Watkins. Ms.
Watkins, why do you not proceed and identify your counsel for
the Committee.
STATEMENT OF SHERRON WATKINS, VICE PRESIDENT
OF CORPORATE DEVELOPMENT, ENRON CORPORATION;
ACCOMPANIED BY PHILIP HILDER, ESQ.
Ms. Watkins. My counsel is Mr. Philip Hilder.
Senator Dorgan. Would you pull the microphone very close to
you while you are presenting testimony. Thank you very much.
Ms. Watkins. Good morning, Mr. Chairman, Members of the
Committee. I am Sherron Watkins and I thank you for the
opportunity to speak to you this morning. I am currently
employed by Enron Corporation as a Vice President. By way of
background, I hold a master's degree in professional accounting
from the University of Texas at Austin, and I have been a
certified public accountant since 1983.
I began my career in 1982 at Arthur Andersen as an auditor.
I spent eight years at Andersen in both the Houston and New
York offices. I joined New York-based MG Trade Finance in 1990
to manage their commodity-backed finance assets, a position I
held until October 1993.
In October 1993, I was hired by Mr. Andrew Fastow and moved
back to Houston to manage Enron's newly formed partnership with
CalPERS, California Public Employee Retirement System. The
partnership was called the Joint Energy Development Investments
Limited Partnership, or JEDI. I held the JEDI portfolio
management position until the end of 1996.
Senator Allen. Mr. Chairman, it is really hard to hear
because of the noise in the hall, and Ms. Watkins we really
want to hear you.
Senator Dorgan. Senator Allen is correct. Let us ask that
we close the door. Do we have security at the door? If we could
ask that the door be closed and remain closed.
Ms. Watkins, if you would pull the microphone as close as
you can and speak up, the Committee would very much appreciate
it.
Ms. Watkins. Just continuing with my testimony: From 1997
until early 2000, I worked for Enron International, primarily
in the mergers and acquisitions group, which is also known as
the corporate development group. In early 2000, I transferred
to Enron Broadband Services, where I worked until June of 2001
in a variety of roles.
In mid- to late June of 2001, I went to work directly for
Mr. Fastow, assisting in the corporate development work that
had recently been put under his supervision upon the
resignation of Cliff Baxter in May of 2001. I worked for Mr.
Fastow in this new role until August of 2001. I have since been
reassigned to the human resources group with a variety of
roles.
While working for Mr. Fastow in 2001, I was charged with
reviewing all assets that Enron considered for sale and
determining the likely economic impact of the sale. As part of
the sale analysis, I reviewed the estimated book values and
market values of each asset. A number of assets were hedged
with an entity called Raptor. Any asset that was hedged should,
for the most part, have a locked-in sales value for Enron.
Meaning that despite current market prices, Enron should
realize the hedged price that it held with Raptor.
It was my understanding that the Raptor special purpose
entities were owned by LJM, the partnership owned by Mr.
Fastow. In completing my work, certain Enron business units
provided me with analyses that showed that certain of the
hedged losses incurred by Raptor were actually coming back to
Enron. The general explanation was that the Enron stock
backstopping the Raptor hedge had declined in value such that
Raptor would have a shortfall and would be unable to fully
cover the hedged price that it owed to Enron.
I was highly alarmed by the information I was receiving. My
understanding as an accountant is that a company could never
use its own stock to generate a gain or avoid a loss on its
income statement. I continued to ask questions and seek
answers, primarily from former coworkers in the Global Finance
group or in the business units that had hedged assets with
Raptor. I never heard reassuring explanations.
I was not comfortable confronting either Mr. Skilling or
Mr. Fastow with my concerns. To do so, I believed, would have
been a job-terminating move.
On August 14, 2001, I was informed of Mr. Skilling's sudden
resignation and felt compelled to inform Mr. Lay of the
accounting problems that faced him. I sent Mr. Lay an anonymous
letter on August 15, 2001, in response to a request for
questions for an upcoming all-employee meeting to be held
August 16 to address Mr. Skilling's departure. At the all-
employee meeting, Mr. Lay commented that our vision and values
had slipped and that any employee who was truly concerned about
anything at Enron, please bring those concerns to him or any
number of the top management, including Cindy Olson, Steve
Kean, and others.
On August 16, I met with Ms. Olson to show her a copy of
the letter and discuss it with her. She encouraged me to meet
with Mr. Lay personally. Since Mr. Lay was traveling for the
rest of the week, she said the meeting would probably take
place the week of August 20.
I met with Mr. Lay on the afternoon of Wednesday, August
22, 2001. The meeting lasted just over one-half hour. I
provided him with memos I had drafted to help explain the
problems facing the company. Additionally, I provided an
analysis of the Raptor entity economics and a presentation
prepared by Enron's risk assessment and control group.
I primarily used the memo titled ``Summary of Raptor
Oddities'' as talking points with Mr. Lay. My main point to Mr.
Lay was that by this time Raptor owed Enron in excess of $700
million under certain hedging agreements. My understanding was
that the Raptor entities basically had no other assets aside
from these hedging activities. Therefore, they had collectively
lost over $700 million. I urged Mr. Lay to find out who lost
that money. If he discovered that the loss would be borne by
Enron shareholders via an issuance of stock in the future, then
I thought we had a very large problem on our hands.
I gave Mr. Lay my opinion that it is never appropriate for
a company to use its stock to affect the income statement.
At the conclusion of the meeting, Mr. Lay assured me that
he would look into my concerns. I also requested a transfer as
I was uncomfortable remaining as a direct report to Mr. Fastow.
I fully expected Mr. Lay to conduct a thorough
investigation into my concerns. I was disappointed that such
was not the case. I was incredibly frustrated with Mr. Lay's
actions or lack thereof. I believed that Enron had a brief
window to salvage itself this last fall, and we missed that
opportunity because of Mr. Lay's failure to recognize or accept
that the company had manipulated its financial statements.
I intend to fully cooperate with this Committee and welcome
the opportunity to answer any questions the Senators may have.
[The prepared statement of Ms. Watkins follows:]
Prepared Statement of Sherron Watkins,
Vice President of Corporate Development, Enron Corp.
Good Morning Mr. Chairman, Members of the Committee. I am Sherron
Watkins. Thank you for the opportunity to address the Committee this
morning.
background
I am currently employed by Enron Corporation as a Vice President.
By way of background, I hold a master's degree in professional
accounting from the University of Texas at Austin and have been a
certified public accountant since 1983.
I began my career in 1982 at Arthur Andersen as an
auditor. I spent 8 years at Andersen in both the Houston and New York
offices.
I joined New York-based MG Trade Finance in 1990 to manage
their portfolio of commodity-backed finance assets--a position I held
until October 1993.
In October 1993, I was hired by Mr. Andrew Fastow and
moved back to Houston to manage Enron's newly formed partnership with
CalPERS, the California Public Employee Retirement System. The
partnership was called the Joint Energy Development Investments Limited
Partnership or JEDI. I held the JEDI portfolio management position
until the end of 1996.
From 1997 until early 2000, I worked for Enron
International, working primarily in the mergers and acquisitions group,
which is also known as the corporate development group.
In early 2000, I transferred to Enron Broadband Services
where I worked until early June of 2001 in a variety of roles.
In mid to late June of 2001, I went to work directly for
Mr. Fastow, assisting in the corporate development work that had been
put under his supervision after Cliff Baxter retired in May of 2001. I
worked for Mr. Fastow in this new role until late August 2001.
I have since been reassigned into the human resources
group with a variety of assignments.
discovery of raptor problems
While working for Mr. Fastow in 2001, I was charged with
reviewing all assets that Enron considered for sale and determining the
likely economic impact of a sale. As part of the sale analysis I
reviewed the estimated book values and market values of each asset.
A number of assets were hedged with an entity called
Raptor. Any asset that was hedged should, for the most part, have a
locked-in sales value for Enron. Meaning that despite current market
prices, Enron should realize the hedged price with Raptor.
It was my understanding that the Raptor special purpose
entities were owned by LJM; the partnership run by Mr. Fastow.
In completing my work, certain Enron business units
provided me with analyses that showed certain hedged losses incurred by
Raptor were actually coming back to Enron. The general explanation was
that the Enron stock backstopping the Raptor hedge had declined in
value such that Raptor would have a shortfall and would be unable to
fully cover the hedge price that it owed to Enron.
I was highly alarmed by the information I was receiving.
My understanding as an accountant is that a company could never use its
own stock to generate a gain or avoid a loss on its income statement. I
continued to ask questions and seek answers, primarily from former co-
workers in the Global Finance group or in the business units that had
hedged assets with Raptor. I never heard reassuring explanations.
events leading to my memos to mr. kenneth lay
I was not comfortable confronting either Mr. Skilling or
Mr. Fastow with my concerns. To do so, I believed would have been a job
terminating move.
On August 14, 2001, I was informed of Mr. Skilling's
sudden resignation and felt compelled to inform Mr. Lay of the
accounting problems that faced Enron.
I sent Mr. Lay an anonymous letter on August 15, 2001 in
response to a request for questions for an upcoming all-employee
meeting to be held August 16th to address Mr. Skilling's departure.
At the all-employee meeting Mr. Lay commented that our
visions and values had slipped and that if any employee was truly
troubled by anything at Enron, please bring those concerns to him or
any number of the top management including Cindy Olson, Steve Kean and
others.
On August 16th, I met with Ms. Olson to show her a copy of
the letter and discuss it with her. She encouraged me to meet with Mr.
Lay personally. Since Mr. Lay was traveling through the rest of the
week, she said the meeting would probably take place the week of August
20.
I met with Mr. Lay on the afternoon of Wednesday, August
22, 2001. The meeting lasted just over one-half hour. I provided him
with memos I had drafted to help explain the problems facing the
company. Additionally, I provided an analysis of the Raptor entity
economics and a presentation prepared by Enron's risk assessment and
control group.
I primarily used the memo titled Summary of Raptor
Oddities as talking points with Mr. Lay. My main point to Mr. Lay, was
that by this time, Raptor owed Enron in excess of $700 million under
certain hedging agreements. My understanding was that the Raptor
entities basically had no other business aside from these hedges;
therefore they had collectively lost over $700 million. I urged Mr. Lay
to find out who lost that money. If he discovered that this loss would
be borne by Enron shareholders via an issuance of stock in the future,
then I thought we had a large problem on our hands.
I gave Mr. Lay my opinion that it is never appropriate for
a company to use its stock to affect the income statement.
At the conclusion of the meeting, Mr. Lay assured me that
he would look into my concerns. I also requested a transfer as I was
uncomfortable remaining as a direct report to Mr. Fastow.
I fully expected Mr. Lay to conduct a thorough
investigation into my concerns. I was disappointed that such was not
the case. I was incredibly frustrated with Mr. Lay's actions or lack
thereof. I believe that Enron had a brief window to salvage itself this
past fall and we missed that opportunity because of Mr. Lay's failure
to recognize or accept that the company had manipulated its financial
statements.
I intend to fully cooperate with the Committee and welcome the
opportunity to answer any questions the Senators may have at this time.
Senator Dorgan. Thank you, Ms. Watkins.
Next we will hear from Mr. Jeffrey McMahon, the President
and Chief Executive Officer of Enron. Good morning. Excuse me,
the President and Chief Operating Officer. I should not elevate
you at this hearing.
STATEMENT OF JEFFREY McMAHON, PRESIDENT AND CHIEF OPERATING
OFFICER, ENRON CORPORATION
Mr. McMahon. Good morning, Mr. Chairman and Members of the
Committee. My name is Jeff McMahon. I am currently the
President and Chief Operating Officer of Enron Corp. I have
been an employee of Enron since 1994. From late October of last
year until early this month, I served as Chief Financial
Officer of the company. Before that, I was President and Chief
Executive Officer of Enron's Industrial Markets Group. From
1998 until March 2000, I was the Treasurer of Enron Corp.
Before that, I served as Chief Financial Officer of its
European Operations.
As the Committee knows, earlier this month I was named
President and Chief Operating Officer, at the same time that
Steve Cooper was named the new interim Chief Executive Officer
and Chief Restructuring Officer of the company. As part of the
new management team at Enron, my focus is on the future--the
future of the business, the future of our nearly 20,000
existing employees worldwide who are looking for continued
employment, the future of our over 8,000 retirees who are
looking for continued retirement benefits from the company, and
the various other stakeholders, including our creditors and
former employees who have an interest in Enron's future.
Working closely with the Board of Directors and the
Creditors Committee, we are developing a restructuring plan
designed to bring the company out of bankruptcy and preserve
value for the company's creditors, employees, and stakeholders.
I believe that Enron can emerge from bankruptcy by returning to
its roots. As Mr. Cooper expressed at the announcement of his
appointment as interim CEO, a reorganized Enron will be
dedicated primarily to the movement of natural gas and the
generation of electricity related to gas assets that Enron
currently owns.
With respect to the issues the Committee is examining, as
the Chairman knows, I've been fully and freely cooperating with
this and other congressional committees in this matter, and I
welcome today's opportunity to answer, to the best of my
ability, questions the Committee may have about past events at
Enron or our future direction.
Thank you, Mr. Chairman.
[The prepared statement of Mr. McMahon follows:]
Prepared Statement of Jeffrey McMahon, President and Chief Operating
Officer, Enron Corporation
Good morning. Mr. Chairman and Members of the Committee, my name is
Jeff McMahon. I am currently the President and Chief Operating Officer
of Enron Corp. I have been an employee of Enron since 1994. From late
October of last year until early this month, I served as Chief
Financial Officer of the company. Before that, I was President and
Chief Executive Officer of Enron's Industrial Markets Group. From 1998
until March 2000, I was Treasurer of Enron Corp. Before that, I served
as Chief Financial Officer of its European Operations.
As the Committee knows, earlier this month I was named as President
and COO, at the same time Stephen Cooper was named the new interim
Chief Executive Officer of the company. As part of the new management
team at Enron, my focus is on the future--the future of the business,
the future of our nearly 20,000 existing employees worldwide who are
looking for continued employment, the future of our over 8,000 retirees
who are looking for continued retirement benefits from the company, and
the various other stakeholders, including our creditors, who have an
interest in Enron's future.
Working closely with the Board of Directors and the Creditors
Committee, we are developing a restructuring plan designed to bring the
company out of bankruptcy and preserve value for the company's
creditors, its employees and its stakeholders. I believe that Enron can
emerge from bankruptcy by returning to its roots. As Mr. Cooper
expressed at the announcement of his appointment as new interim CEO,
our reorganized business will be dedicated primarily to the movement of
natural gas and the generation of electricity.
With respect to the issues the committee is examining, as the
Chairman knows, I have been fully and freely cooperating with this and
other congressional committees in this matter. I welcome today's
opportunity to answer, to the best of my ability, questions the
committee may have about the past events at Enron or our future
direction.
Thank you, Mr. Chairman.
Senator Dorgan. Mr. McMahon, thank you very much.
It is my understanding that a vote has just started on the
floor of the Senate. I think we would be advised to take a 15-
minute recess. There is only one vote. Members of the Committee
will be able to vote and come back and reconvene immediately.
The hearing will stand in recess for 15 minutes.
[Recess from 10:05 a.m. to 10:20 a.m.]
Senator Dorgan. The hearing will reconvene and come to
order.
Senator Snowe, you were not here when we did opening
statements. We attempted to limit them to one minute. Let me
recognize you before I recognize Mr. Skilling.
STATEMENT OF HON. OLYMPIA J. SNOWE,
U.S. SENATOR FROM MAINE
Senator Snowe. I thank you, Mr. Chairman, and I ask to
include my entire statement in the record.
Senator Dorgan. Without objection.
Senator Snowe. Given the unprecedented collapse of Enron,
resulting in the largest bankruptcy in the history of this
country, and given the impact that it has had on dedicated and
trusted employees who lost their 401(k) savings at the same
time many officials at the top levels of the company were
enriched, and given the impact on investors who were led
astray, it is certainly appropriate that we continue to conduct
these hearings.
Hopefully, these hearings will lead closer to the truth. We
certainly do not know whether it will or not. But I do know
this: I wish there had been more Ms. Watkins and Mr. McMahon in
the organization, because it might have well prevented this
catastrophic demise of one of the largest companies in America.
There are many plausibility issues here, Mr. Skilling, and
I hope that you will address them today. As I said when Mr. Lay
was before this Committee several weeks ago, there is a
plausibility gap between the facts as we know them and the
assertions and the denials that have been made by many of you
at the top of this company. Many of those conflicts are not
inconsequential when we are talking about contradictions and
inconsistencies. Many of those have been underscored by the
Powers Report.
So I hope that we will be able to be in a position here
today to begin to clarify many of these issues, because
clearly, accountability and responsibility does rest with those
at the higher levels of the company. Certainly that does start
with you in the time period that you were CEO.
Thank you, Mr. Chairman.
[The prepared statement of Senator Snowe follows:]
Prepared Statement of Hon. Olympia J. Snowe,
U.S. Senator from Maine
Thank you, Mr. Chairman, for holding this hearing today. I would
also like to thank Ms. Watkins, Mr. McMahon, and Mr. Skilling for
appearing before us after testifying in the House on separate occasions
previously.
As I noted at the February 12 hearing when former Enron CEO and
Chairman Ken Lay invoked the Fifth Amendment and declined to testify,
the fall of the colossal Enron enterprise is not a run-of-the-mill
business bankruptcy. A company that once boasted over $100 billion in
revenues rapidly disintegrated into bankruptcy losing $67 billion in
investor money and nearly $1 billion in the retirement plans of its own
loyal employees.
Given this unprecedented collapse and the impact it has had on
dedicated employees and misinformed investors alike, the American
people have a great many questions--and it is our obligation to try to
get to the bottom of what went wrong. The testimony of today's
witnesses will hopefully provide us with some of these answers--and, in
the process, provide us with insight on how to prevent a repeat
performance of this tragedy in the future.
As we turn to our witnesses, I would first like to commend Ms.
Watkins for her bravery in bringing her concerns to the attention of
Mr. Lay in August, and for not mincing words in warning him that Enron
could ``implode in a wave of accounting scandals.'' Given that her
concerns proved prescient, I look forward to hearing more about her
role in informing Ken Lay of the accounting indiscretions occurring in
Mr. Fastow's Finance department, and the subsequent actions that were
taken in response to those concerns.
I also look forward to hearing the testimony of Mr. McMahon who, as
far as we know, was the first to approach Jeff Skilling about his
serious concerns with the conflict of interest presented by Mr.
Fastow's involvement with the LJM partnerships. Given that the LJM
partnerships accounted for at least 40 percent of Enron's reported pre-
tax income by 2000, I look forward to learning more about Mr. McMahon's
meeting with Mr. Skilling.
Finally, because accountability and responsibility starts at the
top, Mr. Skilling's testimony is of particular interest--especially
when considering that he resigned from Enron shortly before its
collapse and claims no knowledge of the financial dealings that brought
Enron down. I believe it is incumbent upon the former COO and CEO to
prove the validity of his claims given the conflicting findings of the
Powers Report and other witnesses, conflicts that are not
inconsequential.
For instance, during his testimony before the House Energy and
Commerce Subcommittee on Oversight and Investigations, Mr. Skilling
stated that he was ``not aware of any financing arrangements designed
to conceal liabilities or inflate profitability.'' However, the Powers
Report--in reviewing the minutes of the May 1, 2000, Board meeting
attended by Mr. Skilling--found notes indicating that the Board and
Enron management were aware that Raptor I was not a true economic hedge
and that it did not ``transfer economic risk but transfers profit and
loss volatility.'' Isn't this a method of masking debts that really do
exist while creating profits that don't exist?
In addition, as outlined earlier, Mr. Skilling seemingly ignored
the concerns of Enron Treasurer Jeff McMahon during a meeting on March
16, 2000. And not only were his conflict of interest concerns ignored,
but shortly after the meeting, Mr. McMahon was transferred to a post in
the company where he would have no contact with Andrew Fastow and his
partnerships. Was that just a coincidence or a sinister effort to push
aside one who dared question the financial structure that ultimately
brought Enron down?
Furthermore, Mr. Skilling essentially claimed to not be fully aware
of Mr. Fastow's dealings with the LJM partnerships despite the fact
that controls were specifically put in the place by the Board of
Directors and management to ensure that Mr. Fastow's allegiance to
Enron--and not his own personal financial gains--remained foremost.
The bottom line is that Mr. Skilling's explanation of events--while
perhaps convenient for his purposes--lacks plausibility given the
conflicting findings and statements of others. Hopefully today's
hearing will bring us closer to the truth in terms of what Mr. Skilling
knew and when he knew it--and ultimately bring us closer to unraveling
the tragic events that unfolded at Enron so that they are never
repeated again.
Thank you, Mr. Chairman.
Senator Dorgan. Senator Snowe, thank you.
Senator Nelson, we allowed one minute for opening
statements. Do you have a statement?
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Mr. Chairman, I would like to continue with
my interest in finding out what happened to many of these state
pension funds around the nation. That will be part of my line
of questioning, particularly the fact that the Florida pension
fund bought almost 3 million shares during a 3-week period
while the stock was dropping like a rock, whereas the money
manager, Alliance Capital Management that had handled other
pension funds--for example, New York--sold their Enron shares
in August, but were purchasing shares for the Florida
retirement fund starting on October 22 in that 3-week period,
just extraordinarily defying logic.
So, I will follow up with that at the appropriate time.
Thank you, Mr. Chairman.
Senator Dorgan. Senator Nelson, thank you.
Mr. Skilling, why do you not proceed, and would you
introduce your counsel as well.
STATEMENT OF JEFFREY SKILLING, FORMER CHIEF
EXECUTIVE OFFICER, ENRON CORPORATION; ACCOMPANIED
BY BRUCE HILER, ESQ., O'MELVENY & MYERS
Mr. Skilling. Yes, Mr. Chairman. This is my counsel, Mr.
Bruce Hiler, who represents O'Melveny & Myers.
Should I go ahead?
Senator Dorgan. Please proceed.
Mr. Skilling. Mr. Chairman, distinguished Senators: My name
is Jeff Skilling. I worked at Enron for 10 years, spent my last
6 months there as CEO. I left the company in August of 2001.
The bankruptcy of Enron has been devastating to its
employees, its shareholders, and many others who were connected
in one way or another to this once-fine institution. As I did
when I appeared before Congress, I want to apologize to all of
those affected people for what Enron has come to symbolize. I
know that no words can repair the harm that has been done and,
as hard and as difficult as these past few months have been for
me and my family, I know that many others have suffered far,
far worse.
I am here today to do my best to help answer the legitimate
questions on everyone's mind regarding what happened at Enron.
Let me begin with a recap of what I understand about what Enron
has said in recent SEC filings.
First, there has been a restatement of three items, none of
which affected cash-flow or future period earnings. Second,
there may have been self-dealing by a small number of
executives, among whom I have not and cannot be counted.
But, in addition to those statements, there is also a raft
of currently unproven assertions of additional accounting
issues, the primary ones relating to something called the
Raptor hedges. What do we know about these hedges? We know that
the company's accountants, Arthur Andersen, agreed with the
treatment of these transactions all the way up to their
technical group in Chicago. We also know that the Powers team
hired another accountant that apparently disagrees with
Andersen, and I take it also that Ms. Watkins also disagrees
with Andersen.
If the focus of this hearing is a game of dueling
accountants, I will state right now that I am not an accountant
and probably have little to add to that debate between experts.
I know that you will be asking questions about who did what
at Enron, but I hope in addition to those technical issues you
will also ask about how a company as strong as Enron can be
bankrupted by what I call a run on the bank. I have some
thoughts that I think a number of you have asked for that might
be helpful and are important to the financial system.
But before we start, there are a few things I think this
record should reflect. I will not respond to all the outrageous
things said about me in this process because some have been so
silly that they merit no response. Three others, however, do
merit a response:
First, I have not lied to the Congress or anyone else about
my recollection of events while I was at Enron.
Second, I never duped Ken Lay. I heard Ms. Watkins testify
to her opinion. I have no idea what the basis is for that
opinion.
Third, I do not believe that my testimony is contradicted
by or is materially different than the testimony of either Mr.
McMahon or Mr. Mintz, for both of whom I have a tremendous
amount of respect.
And now, finally, a few observations about this
congressional process to which I and others have been
subjected. What has happened thus far, primarily in the House,
should be cause for concern of every American. The entire
management and Board of Enron has been labeled everything from
hucksters to criminals, with a complete disregard for the facts
and evidence assembled. These untruths shatter lives and they
do nothing to advance the public understanding of what happened
at Enron. The framers of the Bill of Rights are watching.
My dilemma, like that of other innocents called before
these committees, is whether to take refuge in constitutional
protections to avoid your questions or stand on the
constitutional presumption of innocence to proclaim the truth.
I am here and prepared to answer the Committee's questions
because I have nothing to hide. I take and will continue to
take full responsibility for my actions as a senior executive
of Enron Corporation.
While I worked at Enron, I served the shareholders and the
Board of Directors faithfully. When I left Enron on August 14,
I did not believe the company was in financial peril and I have
no knowledge of any--and had no knowledge, of any wrongdoing by
its employees.
Common decency suggests that I be treated as innocent until
proven otherwise. Common sense suggests that accusations made
now, before the facts are in, are likely to be wrong.
Unfortunately, neither common decency nor common sense will
carry the day in this politicized process.
I am nonetheless hopeful that today we can get past the
rhetoric and focus on the facts. Frankly, based on this
morning's opening statements, I believe that we may actually
have a constructive dialog today, and I hope that's the case.
Mr. Chairman, unlike so many others so much less fortunate
than me, I am not a victim here. But also unlike others, I am
not one of the perpetrators, either. What I know I am prepared
to tell. What I do not know, I do not know either because it
was kept from me or it never happened at all, like so many of
these supposed facts thrown around since my hearings before the
House subcommittee.
With that, Mr. Chairman, I'm prepared to answer your
questions to the best of my abilities.
Senator Dorgan. Mr. Skilling, thank you very much.
First let me say that decency and common sense will prevail
here. This also is a search for the truth, as I have indicated
previously. The truth has proved to be rather elusive with
respect to what happened inside the corporation.
Mr. Skilling, you know that the Board of Directors
commissioned a study to examine what was happening inside the
Enron Corporation. Mr. Powers testified before this Committee
and said what the Board of Directors found in the Powers study
was ``appalling.'' That seems to me to be at odds with your
testimony, because your testimony suggests: ``When I left,
nothing really was happening, there was nothing untoward that
was happening inside the company.''
That is, of course, at odds with what the Board of
Directors of the corporation itself found following your
departure.
I am going to ask a series of questions, as will my
colleagues, and we want to try to understand what all three of
you are saying. All three of you were in this corporation for
some length of time. This corporation has effectively collapsed
and filed for bankruptcy and is now struggling to recover from
that.
Let me ask a few questions. We will go around several
times, and we will have plenty of time.
Ms. Watkins, you said that you met with Mr. Lay for an hour
or about an hour, I believe, when you took to Mr. Lay your
memorandum, which I have read a couple of times. That was a
one-hour meeting?
Ms. Watkins. It was approximately a half-an-hour.
Senator Dorgan. A half-an-hour. Did you sense from that
meeting that Mr. Lay knew what you were talking about? Did he
get it?
Ms. Watkins. He certainly knew that I was concerned, that
my concerns were real. And I did feel at the end of the meeting
that he was going to conduct a thorough investigation.
Senator Dorgan. Ms. Watkins, you indicated in your
memorandum, you talked about you are nervous that ``we will
implode in a wave of accounting scandals.'' The business world
``will consider the past successes as nothing but an elaborate
accounting hoax.''
Then when you testified before the House you said that the
transactions that you were concerned about here were pretty
common knowledge within Enron. Tell me about common knowledge?
Would you believe that the upper echelon of Enron would know
what was happening with respect to the creation of these
partnerships, including Mr. Skilling, Mr. McMahon, Mr. Lay, and
others? When you say common knowledge, would you describe that
for us?
Ms. Watkins. Throughout the Global Finance group, as well
as upper management, I believe it was well understood that the
Raptor entities were primarily backstopped with Enron stock. It
wasn't a hidden fact. I do think certain people thought it was
some magic structure that was acceptable. But others that had
some concerns about it kept their concerns mainly to
themselves.
Senator Dorgan. When you say upper management, do you
believe that would include Mr. Skilling?
Ms. Watkins. Yes, I do.
Senator Dorgan. Yet Mr. Skilling testifies that he really
did not know much about this at all. I am going to go through a
list of Board meetings and so on at some later time.
But, we have a circumstance where you went to Mr. Lay with
a memorandum, a now famous memorandum. You said there are very
serious problems. The language you used is quite remarkable--
``accounting hoax,'' ``accounting scandals,'' and so on. You
say ``common knowledge.'' So do you believe that includes Mr.
Lay? Obviously it includes Mr. Lay after you addressed him with
respect to the memorandum. Did it before that point, in your
judgment?
Ms. Watkins. During our meeting he recollected that the
Raptor structures had been presented to the Board. He believed
that they had been gone over in somewhat detail, that Arthur
Andersen had blessed them. And he asked me: ``Are you certain
there could be something wrong with these structures?''
My point to him was: ``Yes, there is something wrong when
an entity owes us $700 million, we have booked that in the
income statement, we have a receivable from that entity, and
they're going to pay us back by cashing in our own stock.''
Senator Dorgan. Mr. Skilling, were you aware of that
structure? We're talking now about the structure. Were you
aware of that structure?
Mr. Skilling. Yes. I was in the Board meeting that Ms.
Watkins talked about in May of 2000 when the Raptor transaction
was presented. In that Board meeting, there was a relatively
detailed description of the transaction, including a motion
that would essentially approve or set up the original Raptor
transactions, and that was approved by the Board of Directors.
Senator Dorgan. Is it your contention that that structure
was appropriate, inasmuch as Ms. Watkins and others and those
of us in Congress now see that what was backstopping that
partnership was Enron stock? Is it your contention that you
knew of it, and it was appropriate?
Mr. Skilling. I relied on our accountants, who, in fact, I
believe it's very clear--I've seen the minutes of that Board
meeting, and it's very clear that Mr. Rick Causey, who was the
Chief Accounting Officer of the company, represented that
Arthur Andersen and our lawyers had taken a very hard look at
this structure, and they believed it was appropriate.
Senator Dorgan. So you're saying that Arthur Andersen
informed the top executives of the corporation that this was an
appropriate structure? You knew about it, therefore, believed
it was okay because your accountants said it was all right; is
that the case?
Mr. Skilling. The structure was presented to the Board of
Directors. Mr. Causey said the accountants had looked at it and
had signed off on it, and the Board approved that structure.
Senator Dorgan. I am going to go into a different
direction, then I will come back, and we will have several
rounds of questions.
Could you move the microphone just a bit closer.
Mr. Skilling. Yes, sir.
Senator Dorgan. I want to talk about some things I think
you have said that you did not know about. You say you did know
about that structure. Disclosures about Mr. Fastow are
interesting and also I think lead to the use of the word
``appalling'' in the Powers Report. Mr. Fastow has an equity
position in partnerships, makes $30 million in commissions,
invests $25,000 and 60 days later takes out $4.5 million. It
seems to be a corrupt system.
I am wondering, did you know about what Mr. Fastow was
doing with respect to the creation of these partnerships, his
stake in those partnerships, and what he was doing with respect
to the personal financing?
Mr. Skilling. All my recollection is that a lot of issues
related to LJM2 and LJM1, which were affiliated party
transactions, were discussed in depth at the Board of Directors
meeting, including the issue that there would be a potential
conflict of interest created by having Mr. Fastow participate
in that, in those partnerships, and it was believed that the
controls that were approved and put in place for LJM2 would
eliminate that conflict of interest.
LJM1 was a little bit different in that the actual
transaction, the hedging transaction, was approved, so there
was no ongoing issue. That transaction was approved based on a
fairness opinion that had been received from an accounting
firm, that they said this was a reasonable transaction for
Enron Corporation. So I and the other Board members believed
that was adequate protection for our shareholders and approved
it.
Senator Dorgan. Are you surprised by what you have since
learned about Mr. Fastow's compensation?
Mr. Skilling. I can only tell you what I know. I have read
a tremendous amount. I have read conflicting things in the
newspapers. To the extent that the compensation was as some
newspapers have published, of that order of magnitude, yes, I
was surprised.
Senator Dorgan. Let me just ask a brief question of Mr.
McMahon. Then I am going to come back on a second round and ask
a series of questions of Mr. Skilling and Ms. Watkins.
Mr. McMahon, you are currently employed by the Enron
Corporation. We know that there has been shredding of documents
going on at the Enron Corporation. Can you tell me what records
were destroyed, what kind of internal investigation has been
conducted, and what should we learn about and what should we
know about the records that were destroyed?
Mr. McMahon. Currently, I don't believe we do know what
records are destroyed. We, as I understand it, have cooperated
fully with the FBI, who has come in and done some work in the
building, interviewed a lot of our employees who were on the
floors where this shredding may have occurred. As I understand
it, our internal legal counsel and external legal counsel are
also looking into the document shredding allegations.
So at this point, we don't know exactly the outcome of
that. We have secured the building, though, as soon as we were
made aware of it, so the shredders were secured and were
removed from the building. Prior to that, the legal group, as
soon as the investigations began, sent out many emails to all
employees requesting them to retain and protect documents.
Senator Dorgan. Mr. McMahon, Mr. Skilling said that he has
great respect for you. It is the case, is it not, that you went
to Mr. Skilling to express your concerns about what was
happening inside the corporation?
Mr. McMahon. Yes, it was. In March 2000, I had a
conversation with Mr. Skilling.
Senator Dorgan. What was the response to that conversation?
Can you describe the conversation generally and tell us what
the response was?
Mr. McMahon. Generally, at the time--and let me step back
and kind of give you the perspective of the organization.
I was, at that point in time, Treasurer of Enron Corp., and
I was reporting to the then-Chief Financial Officer, Mr.
Fastow. There were two groups reporting to Mr. Fastow at the
time. My group was one and then Mr. Cooper's group, which was
responsible for structured financing. In that fell the LJM
partnerships which Mr. Fastow was a principal in.
The short of it is the conflict of interests, as Mr.
Skilling just described, manifested themselves in my area on a
daily basis, where we had Enron employees negotiating on behalf
of Enron and LJM to do transactions, and it was causing some
problems internally within the organization. So after many
meetings with Mr. Fastow and many meetings with other members
of senior management, I felt that I needed to talk to Mr.
Skilling about those conflicts and how I saw that they should
be fixed.
Senator Dorgan. So you took your concerns to Mr. Skilling.
What happened as a result of that?
Mr. McMahon. We had about a 30-minute meeting, as I recall,
and Mr. Skilling listened intently to my concerns, and at the
end of the meeting he indicated to me that he would remedy the
situation and fix the problems.
Senator Dorgan. Did you lose your job as corporate
treasurer shortly thereafter?
Mr. McMahon. About two or three weeks later, I was offered
a job internally to move to a different group.
Senator Dorgan. Do you think it was a result of your
meeting with Mr. Skilling?
Mr. McMahon. Certainly at the time I did not have that
view. I had been approached around the same time by the then-
head of that division, who asked to recruit me in there, and I
ultimately turned it down. But shortly after meeting with Mr.
Skilling, I did have a meeting with Mr. Fastow, who was then my
boss, who indicated to me that he had spoken to Mr. Skilling
about our conversation and he was concerned whether we could
actually work together again. So when that opportunity did
arise, I did ultimately take it.
Senator Dorgan. But I mean, you are trying to put an
awfully good face on this. It appears to me that you went to
Mr. Skilling and said there are real problems here and the
result is you were transferred. Do you disagree with that?
Mr. McMahon. I think that's a correct statement of the
facts. I certainly don't have any knowledge that that was a
direct result of that meeting.
Senator Dorgan. Mr. Skilling, do you recall that meeting
when Mr. McMahon came to you and said there are serious
problems?
Mr. Skilling. Mr. Chairman, I remember the meeting with Mr.
McMahon, yes.
Senator Dorgan. And do you remember the meeting the same
way Mr. McMahon describes it?
Mr. Skilling. Well, you know, everybody--when you have two
people that are in the same meeting, each will have a somewhat
different recollection. This was about two years ago. It was my
recollection that when Jeff came in, there was a concern about
the conflict leading to an impact on compensation, and I've
stated that before. I've stated that in the House.
And I mean that in no way in a derisory way to Mr. McMahon.
He was raising an issue, his concern about compensation,
because of this structural conflict issue that we had. As you
know, we had procedures within the Board that the Board had
approved to eliminate what we believed was the conflict of
interest. When Jeff came to me, he was suggesting that he
needed my support to ensure that, in addition to the procedures
that were in place, he would need my support to ensure that he
was not damaged by this conflict.
It's my recollection that I assured him very strongly, very
strongly, that I was totally on his side and that the way
compensation was determined at Enron Corporation, it was
determined by something called a performance review committee,
and there are typically 24 people on the performance review
committee. And I said, if Mr. Fastow is concerned, there will
be 23 people in that room that are cheering you on, and I said
it will not impact and I support you in your compensation.
Senator Dorgan. Well, Mr. Skilling, it seems to me that
what Mr. McMahon is saying about that day is at odds with what
you are saying when you say: I left that company, I had no idea
there was anything going on that was a problem. It appears to
me Mr. McMahon said he came to talk to you about these
problems, and you are taking us off into a compensation issue.
I understand that.
But we need to get to the bottom of it. I'll come back
around with a whole series of questions, but it seems to me
that this is at odds with what Mr. McMahon said the meeting was
about. If Mr. McMahon, in fact, did represent these problems to
you, I would like very much for you to tell the Congress: I was
aware of them and did nothing. If that is the case, let us hear
that.
Mr. Skilling. Mr. Chairman, I absolutely disagree with
that. I think----
Senator Dorgan. You disagree with Mr. McMahon?
Mr. Skilling. Sir?
Senator Dorgan. You disagree with Mr. McMahon's statement?
Mr. Skilling. No, I disagree with your statement, if you
said that I heard that there were issues and did nothing about
them. What I did in my recollection is I absolutely told Jeff
that I would support him, as he asked. And I believe--actually,
I didn't even remember this until the testimony in the House, I
guess it was the testimony in the House, where Mr. McMahon
mentioned that Joe Sutton visited him after that. I think I
kind of vaguely recollect going to Joe and saying: ``Can you
please go in there and make sure that this is all taken care
of?''
I actually vaguely remember also going to Mr. Fastow and
putting him on notice that there was an issue here and asking
him to do what he needed to do to ensure that this was not a
problem for Jeff.
Senator Dorgan. I will inquire further about that.
Senator McCain.
Senator McCain. I want to thank the witnesses for being
here.
Ms. Watkins, you have described Mr. Skilling as an intense,
hands-on manager and testified before the House Energy and
Commerce Committee that he was aware of the Raptor
transactions. Is it possible, in your view, that Mr. Skilling
was not aware of the accounting improprieties of the
partnerships that led to the collapse of Enron?
Ms. Watkins. In my opinion, Mr. Skilling was aware of the
problems. It was--the Raptors had to be restructured the first
quarter of 2001, his first quarter as CEO. The Powers Report
highlights that several people recollect that Mr. Skilling was
putting this as one of his highest priorities and had various
individual meetings with people to see about that
restructuring.
I'm certain that Mr. Skilling is right when he says he's
not an expert on accounting matters. However, he did always
look to the market as a checkpoint--rationale--to determine
what we were doing. I think, in my opinion, he would be very
aware that the hedges that we were achieving with Raptor could
not have been achieved with an unrelated outside third party.
Senator McCain. Mr. Skilling, I would be glad to give you
an opportunity to respond to that statement by Ms. Watkins.
Mr. Skilling. As I've said, I was familiar with the Raptor
transaction as it was approved by the Board of Directors and
understood in the terms that were presented to the Board of
Directors how that transaction operated. I believed, based on
the representations of our accountants, that this was an
entirely appropriate structure. And I think there's a
representation in the minutes very clearly to that effect.
When Ms. Watkins talks about a restructuring, or the fact
that what I knew or didn't know, my only recollection of the
restructuring of the Raptors is that I was told that they were
restructuring the Raptors. I asked if the accountants had
signed off on it, if it looked okay, and I was told that it was
and went along with it.
Senator McCain. Was it your responsibility to know?
Mr. Skilling. Sorry?
Senator McCain. Was it your responsibility to know?
Mr. Skilling. As I said, Senator, I am not an accountant.
These are highly, highly--I think if you'll look in the October
minutes at the structure of Raptor, this is a complex, complex
structure, and it took, I think, quite some time for Arthur
Andersen. As I recall, this was even taken to the Arthur
Andersen technical group in Chicago because it was so
technical. And they signed off and said that they thought this
was an appropriate accounting treatment.
Senator McCain. I'd like to move to the issue of broadband.
Are you familiar with Mr. Scott Bolton? He was the manager of
government relations.
Mr. Skilling. I'm sorry, I don't recall him.
Senator McCain. Well, on March 9, Blockbuster and Enron
officially called off their movie-on-demand partnership. Do you
recall that?
Mr. Skilling. I don't recall the exact date, but I do
recall the Blockbuster transaction unraveling, yes, sir.
Senator McCain. And you remember that the stock price
dropped after that?
Mr. Skilling. I'd have to go back and look, but that's
probably right, yes.
Senator McCain. At the Board meeting on March 16 following
the March 9 calling off of the partnership with Blockbuster,
you noted that analysts and portfolio managers in Boston had
questioned you on the decline in the telecommunications market
and how it would affect Enron's broadband business. You told
the Board that ``the development of the business would be
slower than originally expected.'' Do you recall that?
Mr. Skilling. No, I don't recall that specifically.
Senator McCain. You do not recall that. About the same
time, according to Mr. Bolton, you flew to Portland, Oregon, to
meet privately with Enron broadband executives and employees.
You told him the business ``faced a `complete meltdown,' ''
Bolton recalled. There was no demand for high speed internet
services and prices were plummeting. Do you recall that?
Mr. Skilling. What was the date on that, sir?
Senator McCain. Some time in March of 2001.
Mr. Skilling. March of 2001. Yes, I recall a trip to
Portland.
Senator McCain. Do you recall saying that the broadband
business faced a ``complete breakdown''?
Mr. Skilling. I think the actual term that I used was that
the broadband industry, the high speed data interchange
industry, was facing a meltdown. At that time, we believed that
that might have been positive development for Enron, because as
prices dropped we believed there would be more capacity
available to create a traded market in bandwidth.
So we believed very strongly that, in fact, our entire
strategy--and people talked about our strategy in broadband--
our strategy was predicated on a bandwidth glut. We were a low
or modest asset investment strategy, assuming that we could
create a market and a tradeable market for broadband. So as
this market price started to decline late in the first quarter
of 2001, quite frankly, we thought that was a good sign.
Now, the other side--there were two sides of this. That was
the trading side of the business, the merchant side of the
business. I believed that that would be beneficial for the
trading and merchant side of the business. The content side of
the business, which is what you're reacting to or asking about
as it relates to the Blockbuster business, the reason the
Blockbuster arrangement terminated was that Blockbuster was not
able to get some of the content that we thought that they would
be able to provide us and we believed we could get that content
more effectively by directly contacting the studios.
So it was our belief at that time that we would be able to
get the content; we just had to go direct to the studios rather
than working through Blockbuster.
Senator McCain. And in New Orleans at the end of the month,
you said publicly that the broadband operation was going full-
speed, ``pedal to the metal.''
Mr. Skilling. Yes, sir, and we believed very strongly that
the traded market, the market of creating a commodity market
from bandwidth, was progressing well, was progressing much----
Senator McCain. Was that an accurate assessment?
Mr. Skilling. The market was progressing much more quickly
than the electricity market that I had also been involved in
the starting of back in the mid-1990s. So I felt pretty good
about the rate of progress.
Senator McCain. Has your good feeling been substantiated by
subsequent events as far as broadband is concerned?
Mr. Skilling. No. Subsequent to that--in fact, in the next
several months--this meltdown began to have some very, very
serious consequences for credit of counterparties in the
marketplace. It got to the point that you could not sign a
long-term deal for bandwidth because there were no creditworthy
counterparties.
That is what hurt our business, and at that point we
significantly retrenched, cut our capital budget by I believe
75 percent, and began redeploying people. In fact, I believe
Ms. Watkins, the reason that she moved from the
telecommunications business to Mr. Baxter's area is that we
were trying desperately to move our people out of the broadband
business once we realized that there was a serious credit
problem there that we just really couldn't contain.
Senator McCain. I see that my time has expired, but I want
to point out that I understand you told the Board that business
would be slower than originally expected, then you went to
Portland and said that there would be a complete meltdown, but
in New Orleans you said the broadband operation was going full-
speed ``pedal to the metal.''
Mr. Skilling. Mr. Senator----
Senator McCain. I find those statements contradictory.
Mr. Skilling. They're not contradictory.
Senator McCain. If I could finish before you respond. And
certainly not in keeping with subsequent events, which prove
your statement about a complete meltdown throughout broadband
was far more accurate than ``pedal to the metal.''
Mr. Skilling. Again, I don't think that the concepts are
inconsistent at all. We believed--in fact, you can go back
further in time and look at all of the representations that we
made to analysts--that our strategy in the broadband business
was predicated on a glut in bandwidth capacity. You can talk to
anybody in the industry. We were the first people to talk about
that.
There was a meltdown. Prices were collapsing, starting in
kind of that March timeframe, March of 2001. That we believed
was exactly what we had predicted, exactly what we had
projected, and we thought that that would lead to the growth of
the market.
We built the natural gas wholesale business at a time when
gas prices were plunging. We built the electric business at a
time when electricity prices were plunging. That is not at all
inconsistent with the view that we were going to aggressively
build this wholesale side of the business, because it was
turning out the way we expected.
Now, subsequently, it went from a meltdown to--I don't know
that anybody has seen in the history of business--I'm kind of a
history of business buff. I'm not sure there has ever been an
industry in history that has experienced the change of fortunes
that has occurred to the long distance fiber optic business in
the last year-and-a-half. That was unforeseen. It went a lot
further. And we reacted very quickly to it. By July, we began a
significant--June, we began a significant reduction in our
capital budget and started moving people as best we could out
of that business into other growing Enron businesses.
Senator McCain. My time has expired. I thank you, Mr.
Chairman. I thank the witness.
Senator Dorgan. Senator Fitzgerald.
Senator Fitzgerald. Thank you, Mr. Chairman.
Mr. Chairman, I have an advance copy of an article that is
going to be published in Vanity Fair magazine in their April
2002 edition. It is by Marie Brenner, and I am wondering if I
could introduce this into the record. I would like to examine
the witnesses about this.
Senator Dorgan. Without objection.\*\
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\*\ The information referred to has been retained in the Committee
files.
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Senator Fitzgerald. Thank you.
Mr. McMahon, the article that I have just introduced in the
record describes some transactions that occurred within Enron
back in the late 1980s and it is my understanding that at that
time you were employed with the firm of Arthur Andersen. Is
that correct?
Mr. McMahon. I'm not sure what time period you're talking
about in the 1980s, but I was employed with Arthur Andersen
from I believe 1982 to 1988 or 1989, somewhere around there.
Senator Fitzgerald. Were you, while you were at Arthur
Andersen, involved in an investigation into some
misappropriated funds at a company called Enron Oil?
Mr. McMahon. Yes, I was.
Senator Fitzgerald. According to Marie Brenner's article in
Vanity Fair--and Marie Brenner is a Columbia University adjunct
professor--the issue with the company in 1987 involved the
misappropriation of moneys by two traders at that Enron
subsidiary, Enron Oil, and that both the Enron auditors and the
Arthur Andersen auditors who looked into the matter were in
complete agreement. The auditors adamantly told Mr. Ken Lay
that the two rogue traders should be fired.
Is that your recollection, Mr. McMahon?
Mr. McMahon. My recollection of that--it's quite some time
ago--I was a manager at Arthur Andersen on that subsidiary
audit of Enron, which was in New York. And my recollection is
that we found that the senior management of that organization
had been misreporting its trading activities to the parent in
Houston, the corporate parent. We did issue a report expressing
the breakdown of controls and the concerns we had. I don't
recall whether the report suggested that the senior management
should be terminated, but I believe they were terminated the
day the problems were discovered, is my recollection.
Senator Fitzgerald. Well, this article claims that the
auditors recommended to Lay that the two rogue traders be fired
and it was instead decided that those involved would be kept on
the Enron payroll. They eventually wound up being convicted of
various crimes such as fraud and tax evasion and served jail
time and probation time. According to a former Enron auditor
quoted in the article, ``Lay read the report and he read his
budget and estimated how much they, the two rogue executives,
made and if they were fired what he could lose. My conclusion
was that this guy is a guy who puts earnings before scruples
rather than reacting to the dishonesty right in front of him.''
But you, Mr. McMahon, you do not have any recollection of
both the Enron internal auditors and Arthur Andersen auditors
recommending that the rogue traders be fired?
Mr. McMahon. My recollection, Senator, is that they were
fired as soon as the problems were discovered, because I spent
most of my year up in Valhalla, New York, that year, and the
two top executives that were accused of this were not in the
office.
Senator Fitzgerald. There was not any period of time that
they were kept on the payroll after it became clear that there
had been misappropriation of funds?
Mr. McMahon. Actually, I don't know how long they were kept
on the payroll. They certainly were not operating out of that
office once the auditors got there.
Senator Fitzgerald. So you did not draw any conclusions
about Mr. Lay from that incident?
Mr. McMahon. No. I think our view at the firm at the time
was that this was, in fact, rogue traders who had violated a
corporate policy, and ultimately, that business unit was shut
down by Enron, as I recall, and rolled under another senior
executive based in Houston.
Senator Fitzgerald. Mr. Skilling, I appreciate your
testifying today. You made it quite clear in your testimony
before the House and again this morning that you were aware of
no accounting improprieties and that you relied on the
representation of Enron's auditors, Arthur Andersen, your
accountants, in telling you that the accounting was appropriate
for the Raptors transactions. And you were aware of the Raptors
transactions, but you believed the accounting was appropriate.
Is that correct?
Mr. Skilling. I was aware--yes, that is correct.
Senator Fitzgerald. Were you, on the other hand--leaving
aside whether the accounting was appropriate--were you aware
that the structure of the transactions entailed a degree of
risk for Enron?
Mr. Skilling. No, sir. What was presented to the Board and
the general concept, as I understand it, of the Raptors was
that there would be an entity established, there would be value
put in the entity, we would attract third-party equity capital
into that entity, and that entity would write a derivative that
would basically hedge some of our high technology----
Senator Fitzgerald. What was your understanding of how the
Raptors were capitalized?
Mr. Skilling. There was third-party equity from the
outside.
Senator Fitzgerald. Entirely with third-party equity? That
was your understanding?
Mr. Skilling. No, it was my understanding that there was
some Enron equity involved.
Senator Fitzgerald. What was the Enron equity?
Mr. Skilling. I don't know, sir.
Senator Fitzgerald. You didn't know? You didn't know what--
did Enron put its own stock into the Raptors?
Mr. Skilling. I believe if you go back to the Board minutes
where it was approved, that would have laid out in detail what
the specifics----
Senator Fitzgerald. And you were aware Enron had issued its
own stock to the Raptors, were you not?
Mr. Skilling. You cannot issue stock to the Raptors without
having approval of the Board of Directors, is my understanding.
Senator Fitzgerald. So you were aware of that?
Mr. Skilling. If it's in the minutes.
Senator Fitzgerald. You were aware that Enron had issued
its own stock. And they issued a lot of stock, did they not, to
the Raptors?
Mr. Skilling. I don't know, sir.
Senator Fitzgerald. Did you ever look into it?
Mr. Skilling. As I said, I had no reason to think there was
a problem. My accountants and internal people told me that the
hedges were in place and good.
Senator Fitzgerald. If they had come to you and said they
had to double the amount of Enron's allowable outstanding
shares so they could issue them all to the Raptors, would that
have concerned you?
Mr. Skilling. I think if they had come to me and said that,
probably my first question would have been, is this okay, are
the accountants okay with it? If they said it's fine, I
probably would have said okay.
Senator Fitzgerald. So you did not see issuing stock as
being at all risky to capitalize the Raptors with even an
unlimited amount of Enron stock?
Mr. Skilling. See it as risky? Quite frankly, as long as
the accountants had told me that they thought this was an
appropriate structure, I felt comfortable with it.
Senator Fitzgerald. As long as the accounting was okay, you
weren't concerned about risk? Risk is something different than
the accounting.
Mr. Skilling. Well, no, sir. Senator, I think you can ask
anyone, you can ask everyone sitting at this table. If there
was anybody that was concerned about protecting the company
against economic risk, it was me. I absolutely was concerned
about protecting the company from risk.
Senator Fitzgerald. But you saw nothing risky in issuing
even an unlimited amount of Enron stock to these other
entities?
Mr. Skilling. I thought the transaction was an appropriate
transaction, Senator.
Senator Fitzgerald. I am not asking whether it is
appropriate. I am asking whether----
Mr. Hiler. Senator, with all due respect. Senator, I am
sorry. I apologize for interrupting, but I do not think he has
testified that he did or did not see a problem with issuing an
unlimited amount of stock. He is trying to give you his best
recollection, and he has said that whatever the minutes
reflect, he probably would have heard. And I think he can tell
you whether he has a recollection of an unlimited amount of
stock or a little stock or however much stock was going to be
issued, as long as he has a recollection of it.
Senator Fitzgerald. I just want to nail down: In your mind,
was it--not whether it was appropriate or not from an
accounting standpoint, but was it risky at all to issue Enron's
own stock to the Raptors?
Mr. Skilling. Again, it was my understanding that the
purpose and the function of the Raptors was to provide hedges
for highly volatile technology investments that we had made. So
I believed that we were reducing the risk to the company
absolutely.
Senator Fitzgerald. Even though it was backed by Enron's
own stock?
Mr. Skilling. There was third-party equity involved as
well, Senator.
Senator Fitzgerald. But that was a small percentage, was it
not?
Mr. Skilling. Again, I know what the concept was that was
presented to the Board of Directors. I was not involved in the
specific negotiations of the structures, the pricing of the
structures. I was under the impression, as were many people in
the company, as was the Board of Directors, that this was a
hedge of those highly volatile technology investments.
Senator Dorgan. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Mr. Skilling, in my opening statement I went through the
barrage of warnings that you seem to have gotten from high-
level insiders at Enron. I would like to ask some more about
what happened after Mr. McMahon warned you. You said this
morning that you went to Mr. Fastow. Did you specifically in
that conversation with Mr. Fastow talk about the conflict of
interest questions in the partnerships that Mr. McMahon talked
about?
Mr. Skilling. Mr. Senator, you said that I'd received a
bunch of warnings. I don't recall any of these being--the ones
you mentioned, quite frankly--being in the form of a warning.
Senator Wyden. All those people who said that they were
warning you. Ms. Watkins--I went through----
Mr. Skilling. Ms. Watkins did not talk to me, Senator.
Senator Wyden. Well, Ms. Watkins said, and I quote here:
``Ms. Watkins said that Clifford Baxter told her that he met
with you repeatedly to express his concern about the
partnerships.''
Mr. Skilling. In my House testimony I've been very clear on
my recollection of the discussion that I had with Cliff. As I
mentioned in that discussion, Cliff had expressed--Cliff and
Andy had a--they didn't like each other. They had a very
strained personal relationship, and Cliff's issue had nothing
to do with the appropriateness or inappropriateness of the
transaction. It had everything to do----
Senator Wyden. Let us talk about your conversation with Mr.
Fastow about whether conflicts of interest at the partnerships
were mentioned after Mr. McMahon came to you.
Mr. Skilling. I'm sorry; say again?
Senator Wyden. Were conflicts of interest discussed with
Mr. Fastow after Mr. McMahon came to you and raised those
questions specifically?
Mr. Skilling. We discussed the conflicts of interest
embedded in LJM at virtually every Board meeting of the
company, and most of those were subsequent to that meeting.
That was in March 2000. That was very early in the process.
There were very few transactions in the LJM transaction or
in the LJM structure. So we had lots of discussions and they
are documented in the Board of Directors meetings--minutes.
Senator Wyden. Well, I am concerned because after Mr.
McMahon stated his concerns, you continued to put a lot of
confidence in somebody who seems to be at the heart of the
conflict questions. I think what I would like to ask you is
what did you see in Mr. Fastow that made you have faith in him
that he could resolve these questions and protect the interests
of all concerned?
Mr. Skilling. Senator, you can look at the minutes of the
October 1999 Board meeting and Finance Committee meetings. We
dealt explicitly with the issue of conflict of interest created
by the LJM partnerships and put in place a system of controls
to offset those conflicts, and I felt comfortable, as did the
Board, that those conflict control mechanisms were in place.
Jeff raised a different issue in my mind. The issue was
related to how these conflicts of interest might impact
compensation of people in his position. I assured Mr. McMahon
that it would not impact his compensation, and I think
subsequent to that, as I've mentioned--and again, I have only a
general recollection of this--I believe I did talk to Mr.
Sutton, who was Vice Chairman of the company, and asked him to
look into the concerns, any other concerns that Jeff had
related to that. And I talked to Mr. Fastow and put him on
notice that there had been a complaint and that I expected him
to deal with it.
Senator Wyden. Mr. McMahon, my understanding is that your
concerns went to conflicts of interest at the partnerships and
not just conflicts of interest involving this compensation
issue. Could you clarify that?
Mr. McMahon. The meeting I had with Jeff was--again as he
indicated, the Board had approved the conflict of interest
existing. My issue was really the process internally on how
that conflict was managed. You had the CFO of the company who
had a personal interest in a partnership outside the company.
People who worked for him were negotiating both on behalf
of Enron and on behalf of the partnership, and it created not
only a conflict at the CFO level, but it created conflicts
within the organization because that CFO had a very large
impact on their compensation, on their promotion capabilities,
et cetera, et cetera, et cetera.
So that was my discussion with Mr. Skilling, was how that
conflict between Mr. Fastow and his partnership manifested
itself within the day-to-day operations of the organization. So
my issue was process-driven more so than anything else,
Senator.
Senator Wyden. Do you want to respond to that, Mr.
Skilling? Because it seems to me that when Mr. McMahon brings
you a fundamental issue about conflict you go to the person who
has got the biggest conflict.
Mr. Skilling. I concur with what Jeff just said. He came to
me with a process issue and raised some issues about
compensation. I believe that I had resolved that by telling
Jeff I would totally support him in the compensation issues
related to this.
On the issues of people negotiating, or what I might call
logistics of the process--as Jeff said, he was concerned about
the process--again, I recall I spoke to Mr. Sutton, who was
Vice Chairman of the company, and asked him to get with Jeff
and see if we could deal with that. Now, in addition to that, I
did go to Andy and put Andy on notice that a problem had been
raised and I expected the controls to be operated effectively.
That's my best recollection of what happened, Senator. I
believed we addressed the problem.
Senator Wyden. Now, in the meetings of the October 6 Board-
Finance Committee discussion, Mr. Fastow discussed how to
mitigate potential conflicts and ``Messrs. Buy, Causey, and
Skilling approve all transactions between the company and the
LJM funds.'' Did you approve all the transactions?
Mr. Skilling. No, sir.
Senator Wyden. Now, Jordan Mintz, an Enron lawyer,
testified that he tried to get you to sign approval sheets for
the LJM deals and reminded you that your signature was
required. I understand that you have said that you did not
believe that your signature was required; is that correct?
Mr. Skilling. Well, you've asked a couple of questions
there. One question was what did Mr. Mintz say. Frankly, I
don't believe that is Mr. Mintz' testimony, so I'd like you to
give it to me again.
Senator Wyden. That was the testimony.
Mr. Skilling. Can you give it to me again? Do you have a
specific reference, sir?
Senator Wyden. He testified that he tried to get you to
sign approval sheets for the LJM deals and reminded you that
your signature was required.
Mr. Skilling. Do you want to--can we bring forward and pass
out to the Members of the Committee Mr. Mintz's specific memo?
Also, Mr. Mintz had another memo, which I have seen
subsequently. And by the way, I also thank the staff of the
House committee, because I think they have done a pretty good
job getting documents, and it's been interesting to see a lot
of the documents.
But there are two memos from Mr. Mintz. The first one lays
out what the process is that the Board approved, and if you
would like a copy of that I'd like to send it to you.
Senator Wyden. All right, let us do this, Mr. Skilling.
Even if you did not believe your approval was required----
Mr. Skilling. My approval, Mr. Senator, was not required.
In the October 1999 Board minutes there is a very, very clear
description of what the approval process is, and my name is not
on it. Now, subsequent to that, as Mister--and I think you'll
see it in Mister--would you look at this, rather than----
Senator Wyden. Sure.
Mr. Skilling. This is an LJM approval process sheet. This
is to Messrs. Buy and Causey, March 8, 2001. So this is
subsequent. This is March 8, 2001, subsequent to the October
Board meeting. The title of this memo is ``LJM Approval
Process--Transaction Substantiation.'' And this is from Jordan
Mintz.
The thing says, and here's what it says. They have an
``Overview'' and it says: ``In order to address these three
critical and overlapping concerns''--the concerns basically
related to conflicts of interest--``the Board has previously
approved the following procedures and controls.'' Now, this is
the head of Global Finance, legal:
Number 1: ``Enron and LJM are not obligated to one another
to transact.''
Number 2: ``Enron's Chief Accounting and Risk officers are
to review and approve the terms of all transactions Enron or an
affiliate enters into with LJM.''
Number 3: ``The Board's Audit and Compliance Committee
shall annually review all transactions completed that year and
make any recommendations they deem appropriate.''
Number 4: ``The Board is to determine, also annually, that
Andrew Fastow's controlling position at LJM and his involvement
as a counterparty to Enron does not adversely affect the best
interests of the company.''
Period. That is the process. This is the head of the legal
department of Enron Global Finance laying out what the Board
procedures are. That's what the Board procedures are.
Subsequently, there was an LJM subsequent or supplemental
approval sheet that was come up with, and oftentimes or
sometimes they had my name on that sheet.
Mr. Mintz did not deliver those sheets to me. If Mr. Mintz
had delivered those sheets to me and if I had looked at them
and I saw Mr. Causey's signature and saw Mr. Buy's signature
and saw the appropriate signatures within the company, I
absolutely would have signed those and had no problem
whatsoever in signing them. I did not receive those documents.
Senator Wyden. My time is up for this round, but I want to
finish with just one question, because it looks to me when you
examine the minutes and all of these associated other documents
that you had a responsibility as the Chief Executive Officer to
understand who was specifically designated by the Board to
police Mr. Fastow's activities. Do you disagree that you were
given that responsibility as Chief Executive Officer?
Mr. Skilling. I can't be any more clear about this. You say
going through the minutes and going through the documents.
Well, let's go through the minutes and let's go through the
documents. We did that. I just told you.
Senator Wyden. I will tell you, having read from the
minutes specifically, it says Messrs. Buy, Causey, and Skilling
are to approve all transactions with the LJM funds.
Mr. Skilling. Okay, now back up. Back up. That is the
October 2000 Board meeting, is it not? This is Mr. Fastow's
representation of the process that was in place. I believe it's
a Finance Committee meeting, is it not?
Senator Wyden. Right.
Mr. Skilling. And who is making that statement?
Senator Wyden. I just gave it to you.
Mr. Skilling. No, who made the statement?
Senator Wyden. According to the minutes, Mr. Fastow.
Mr. Skilling. Mr. Fastow represented that that's what the
process was. Mr. Fastow was in error. I've got something here
from the General Counsel of Global Finance that lays out in
absolute clear, clear specific terms what that process was. If
you go back to the October 1999, minutes for the Board of
Directors where LJM was approved, you will find that that
process is very clearly specified, and it's the process I just
described to you.
Senator Wyden. Mr. Skilling, any way you parse this, you
had the responsibility as the CEO to watchdog this area of
conflicts and I see absolutely no evidence that that was done,
in spite of this small barrage of warnings.
We will have another round.
Mr. Skilling. Mr. Senator, may I respond to that? Mr.
Senator, we had two organizational units that were charged with
reviewing these LJM transactions and the conflicts generated.
One was our internal accounting group. We had 600 lawyers in
that internal accounting group. Our Risk Control Group under
Rick Buy, we probably had 250 people that worked in that
organization. They reported directly to the audit committee of
the Board of Directors.
Did I feel comfortable that these transactions were being
properly vetted by those two huge organizations? Yes, sir, I
did. Did I feel that the process that was in place was an
adequate process to eliminate these conflicts of interest? Yes,
sir, I did.
Senator Dorgan. Senator Cleland.
Senator Cleland. Thank you very much, Mr. Chairman.
Mr. Skilling, I am going to give you what in basketball
terms is just a free throw here, just a free shot.
Mr. Skilling. Thank you.
Senator Wyden. I am just trying to understand all of this.
Just literally here, not as an expert in your business--you all
are--not as a business person, but as somebody who does
represent hundreds of thousands of people, people in my state,
that were hurt by actions taken at Enron and by the Enron
implosion, on behalf of my school teachers, on behalf of my
state employees, on behalf of Enron employees who went bankrupt
because they put their 401(k) and life savings into Enron stock
and are now sacking groceries at Kroger. On their behalf: In
your opinion, what happened to cause this collapse?
Mr. Skilling. Boy, I'll tell you, I appreciate the
question, and I'm surprised that more people haven't asked the
question before. I believe that this was a classic run on the
bank. There is a problem that I believe is what the economists
call a systemic problem that's in our economy today, that I
think you all ought to be addressing. What the systemic problem
is is there is something called MAC clauses that have started
creeping into financing in all levels of organizations in all
sorts of different financial transactions.
The derivatives business--you are all familiar with the
derivatives business. Worldwide it is probably a couple hundred
trillion dollars of contracts that are outstanding. Most of
those contracts conform to ISDA standards. ISDA is the
International Swap Dealers Association. All of those contracts
have something called a material adverse change clause in them.
What's happened is that in the old days, in the 1880s, when
there was a run on the bank, it was the bank that went under.
What happens now is the banks can pull their money out of a
company that is threatened, and if somebody walks in claiming
an accounting fraud, is tantamount to walking in, in the
business world, is tantamount to walking into a crowded theater
and screaming ``Fire.'' Everybody runs for the exits.
And there are these triggers in all of these financial
contracts, in all of these loans, that mean that even a modest
problem that can be dealt with--these are not big numbers in
the grand scheme of Enron Corporation if we had time.
This is my hypothesis. I wasn't there. But I think if the
company had some time and had access to some liquidity, I think
the company would have been fine. And I think that's the issue.
We have allowed a change in the--when they set up the Federal
Reserve Board, the Federal Reserve Board and deposit insurance
was to try to keep runs on the bank--the reason you don't want
to have a run on the bank is because if there was a run on the
bank, the banks started pulling money out of the real economy
and they stopped lending or they started taking back their
loans.
We have it now automatically built into the contracts,
material adverse change clauses, which means if anything
happens to the borrower the bank can come in and pull their
money back. You know the old story about the bear, the two guys
talking about the bear? The one guy says: ``If a bear comes,
just run like hell.'' The second guy says: ``You can't outrun a
bear.'' The other guy says: ``I don't have to outrun the bear;
I just have to outrun you.''
You have a situation where the banks get an automatic
trigger and they start sucking liquidity out of a company. It
is very, very difficult to replace that liquidity. If I were in
charge of the world, probably what I would do is I would
mandate that federally-insured deposit institutions have to
strike those contract structures from their lending and from
their swap agreements.
I think this is--it's my hypothesis. You may look at it and
find out it's just totally not true. But it was a run on the
bank. It was a liquidity problem.
Senator Cleland. But are we not talking a little bit more
than about George Bailey, Jimmy Stewart, and ``It's a Wonderful
Life''? I mean, we are talking a little more about that than I
think you admitted to.
Do you see any problem with the whole Andersen relationship
that seems to have been part of the whole systemic problem that
you describe, so that the people that are supposed to be
outside the tent checking the people inside the tent were
inside the tent playing the game?
Mr. Skilling. I, like many other people, relied on the
advice that I got from Arthur Andersen. If there is an issue
there--and I know you all are looking at it--I think that is
clearly something that should be looked at.
Senator Cleland. Ms. Watkins, you have seen this from the
inside. You had guts enough to write a memo. You have described
Enron leadership, the leadership culture there, as arrogant,
intimidating, but you had enough courage to fight through that.
What is your understanding of what went wrong at Enron?
Ms. Watkins. The accounting questions--on October 16 when
we had what was virtually an unexplainable income statement
writedown, as well as a $1.2 billion reduction of shareholders
equity, those were related to the Raptor transactions, to LJM2.
It was not a typical writedown, where you've paid too much for
an asset, it's not worth what you paid for it, and you write it
down. It was really effectively unwinding these Raptor
transactions.
In my opinion, we could not explain it to the investor
community, because to do so would highlight the fact that we
really probably needed to restate earnings in 2000 and the
first part of 2001.
I think Mr. Skilling is correct that what killed the
company was a run on the bank. I don't know that it was from
bankers. I think it was actually from our trade creditors, the
people that we owed money under gas contracts and power
contracts, that closed out the contracts and requested their
cash. They were uncertain about our future. They had a legal
right to close those contracts and so they did.
I stated in my earlier testimony, I think if Mr. Lay had
been able to recognize the gravity of financial statement
manipulation and the loss of trust in the investor community
when there's even a hint at financial statement manipulation,
he would have better planned for the ensuing crisis that hit
the company. We, I believe, went into that crisis in late
October totally unprepared. We did not shore up any kind of
equity or debt financing. There was a run on the bank. I think
we went through billions of cash in a very short period of
time, and once we lost our investment grade rating two large
tranches of debt became immediately due, and that was the end.
Senator Cleland. Teddy Roosevelt once said that ``the
leader works in the open and the boss is covert. The leader
leads and the boss drives.'' One of the problems that I saw
initially with the Enron leadership was, as I said at the first
hearing here, that in combat, officers eat last, but in this
mortal combat of economic competition it seemed that the Enron
officers ate first. This whole culture of intimidation of
arrogance, covert operations, the off the books, this whole
sense of not leadership, but bossism, do you think that got
Enron in trouble?
Ms. Watkins. Yes, I do, because I think it led good people
astray in the fact that they did not question structures that
they were not comfortable with. I think Senator Fitzgerald has
mentioned this Vanity Fair article. I understand there are some
quotes in that about Mr. Skilling's intimidating practices, and
they're worth reading.
Senator Cleland. Thank you, Mr. Chairman.
Senator Dorgan. Senator Burns.
Senator Burns. Thank you, Mr. Chairman. I have just two
questions.
Ms. Watkins, can you give me what and when triggered your
concerns that the company was going down the wrong road; what
heightened your concerns that the company could implode if they
stayed on the same path? Could you give me a timeframe in
there? What triggered your curiosity, what happened at what
point?
Ms. Watkins. Okay. When I was pulling together the economic
analysis of our assets held for sale for Mr. Fastow, which
began in mid- to late June and continued through August of
2001, there were a number of assets, most notably of ET and the
New Power Company, that were hedged with Raptor. The hedged
prices were not what the business units said Enron could
achieve, and they explained the structure to me, explained that
the structures were backstopped by Enron stock. Enron's stock
price had declined and the Raptor entities were basically going
bankrupt, and they were going to be unable to pay Enron the
money that Raptor owed Enron.
Well, it concerned me greatly that you can never use your
stock to affect your income statement. I believe that I--before
I went to Mr. Lay, I actually also went to Rex Rogers, who is
an Associate General Counsel for Enron Corp. under Jim Derek. I
told him--I think this might also be in some of the notes----
Senator Burns. Was that conversation before you had the
conversation with Mr. Skilling?
Ms. Watkins. I did not have a conversation with Mr.
Skilling. I had a conversation with Mr. Lay on the 22nd.
Senator Burns. Okay.
Ms. Watkins. But when I talked to Mr. Rogers, I told him
that when I found this in July my first reaction was to start
to hunt for another job. I did not want to work for such an
unethical company. My goal was to find a job and get up the
courage to go talk to Mr. Skilling and tell him to stop this;
he put this in motion; he needs to find a way of fixing it.
When he suddenly and shockingly resigned August 14, I felt
compelled that I had to warn Mr. Lay that--Mr. Lay had no idea
what was facing the company when this stock would have to be
delivered to Raptor some time in 2002 and 2003.
Senator Burns. Was that the only conversation you had
outside your office with that counsel?
Ms. Watkins. I also met with Mr. McMahon for an hour-and-a-
half on August 21. That is when I discovered that Mr. McMahon
had had a conversation with Mr. Skilling and that his concerns
were not addressed. A few weeks later, he got a new job offer
and felt like that was in his best interests to take that
offer.
It's notable that Mr. McMahon's replacement was Mr. Ben
Glisson, effectively letting the foxes into the henhouse. Mr.
Glisson, as we all now know, was an investor in the LJM
partnerships.
Senator Burns. My question now kind of addresses the
concerns that most of us around here have, in that we all had
organizations in our own states that lost money. And as I made
in my statement--the point of my statement--I think we should
be looking here to the outcome of this.
Mr. McMahon, you said that there is a chance that Enron can
survive and regain some position in the corporate world, that
it could survive. What do you point to to base your conclusion?
Mr. McMahon. The conclusion that--or the facts that I point
to--to base that conclusion on are several. Well, first off,
let me state, if there is a reorganized entity here, it will
look nothing like its predecessor. For all intents and
purposes, the entire merchant business--energy business--of
Enron is gone. It was sold recently through the bankruptcy
court, and what's left is in wind-down mode.
So what we are looking to is to find the best way to
maximize recovery for our creditors and other stakeholders.
Both Steve Cooper, who is the CEO, and myself believe that it's
a combination of selling certain assets as well as reorganizing
around other assets, because we think potentially that there's
a more--that there's a higher value creation or preservation in
that scheme. And what to reorganize around is still being
debated right now internally, but it's likely to be our
pipelines and power stations that we have.
Senator Burns. This may be inappropriate, but what are some
of those assets?
Mr. McMahon. Well, what's left with Enron outside of
wholesale, or outside the merchant business, are interstate gas
pipelines. There's a utility in Portland, Oregon. And there's
several utility-type assets in South America and Europe.
Senator Burns. Has Enron completely separated itself from
the broadband services?
Mr. McMahon. It's certainly in liquidation. We may still
have some assets that are left, but they're on the market to be
liquidated.
Senator Burns. Thank you, Mr. Chairman.
Senator Dorgan. Senator Boxer.
Senator Boxer. Mr. Skilling, Senator Cleland gave you a
chance to get a softball, and, if I might say, your answer
stunned me. This was your chance to tell us what went wrong in
the company, how you might do something different. And you know
what you said? It's those MAC clauses--that stands for material
adverse changes--that allowed the banks--federally-insured
banks, Mr. Chairman--to pull out of this company. And you said
if you ran the world, you would change that.
Well, you're a good, smart student of history, and we saw
what happened during the Depression. That's when our
predecessors decided it was important to federally insure
banks. I want to say to you, if that's your answer, I hope no
one on this Committee takes your advice, because we'd have
banks going broke, and we'd have this government going broke
because we would force them to stick with a company that was
essentially a shell game, which apparently you didn't get. But
your Vice President did. I am absolutely stunned with that
answer.
When you answered Senator McCain--he was asking you a
series of questions--you said: ``This is very complex.'' This
is very complex. One of the things I've learned, in years of
getting batted around in politics, is that when somebody tells
you, ``This is very complex,'' you've got to dig behind that.
How complex is it to know what was going on? I want to tell
you, if you look at Ms. Watkins' testimony, she says it in a
sentence, ``My understanding as an accountant,'' she says, ``is
that a company could never use its own stock to generate a gain
or avoid a loss on its income statement.'' Is that true?
Mr. Skilling. Um.
Senator Boxer. Were you aware of that?
Mr. Skilling. I am not an accountant.
Senator Boxer. I didn't ask you that. Is her statement
true?
Mr. Skilling. I think I'd have to be an accountant to know
if it's true. I don't----
Senator Boxer. Wait a minute. You have to be an accountant
to know that a company could never use its own stock to
generate a gain or avoid a loss in an income statement. What
was your education, Mr. Skilling? I know I read that it was
pretty good. What----
Mr. Skilling. I have a master's in business administration.
Senator Boxer. A master's in business administration. And
yet you didn't know this simple fact. Is that correct? You're
saying you were ignorant of that fact that Mr. Watkins has told
us.
Mr. Skilling. Well----
Senator Boxer. It's not complicated.
Mr. Skilling. I'll give you two----
Senator Boxer. Even----
Mr. Skilling. I'll give you two----
Senator Boxer [continuing]. Those of us up here understand
very clearly.
Mr. Skilling. Okay, well----
Senator Boxer. The company can never----
Mr. Skilling. Well, just a second, Senator. Let me give
you----
Senator Boxer [continuing]. Its' own stock to generate a
gain or avoid a loss. And you're saying--getting your
master's--and where did you go to school?
Mr. Skilling. Harvard Business School.
Senator Boxer. Okay. In Harvard Business School, you did
not know this. Is that correct?
Mr. Skilling. I did not know that there is an absolute
prohibition on it, because I--you know, I--again, I am not an
accountant, but I know of at least one case where that's not
true--at least one case.
Now, I'd also suggest that you go through Mr. Duncan's
notes that he gave to Vinson & Elkins where he described the
accounting rationale, and I think you'll find that he has a
rationale. And if you want an example of a case where equity
can be used----
Senator Boxer. That's okay.
Mr. Skilling. No, Senator----
Senator Boxer. I----
Mr. Skilling. Senator, may I answer the question?
Senator Boxer. Yes.
Mr. Skilling. [Inaudible]. Answer, all right? There are
cases where you can use equity to impact your income statement.
And the most egregious, or the one that's used by every
corporation in the world, is executive stock options. As a
matter of fact, I think FASB [Financial Accounting Standards
Board] tried to change that, and you introduced legislation in
1994 to keep that exemption.
Essentially, what you do is you issue stock options to
reduce compensation expense and, therefore, increase your
profitability. That's one exception. So that is clearly a case
where equity can be used to impact your income statement.
Are there other exceptions? I don't know. I'm not an
accountant. I would guess there are. If you read Mr. Duncan's
testimony, I think he--he had a logic--he had a set of logic
that was consistent with his view that this was an entirely
appropriate transaction.
Senator Boxer. Yes, I think we understand stock options.
I wanted to ask Ms. Watkins--you said that you didn't want
to go to Mr. Skilling. Why? What was your issue?
Ms. Watkins. I did believe it would be a job-terminating
move.
Senator Boxer. Say that again.
Ms. Watkins. I believed that it would be a fruitless
effort. And I believe that now even more than I did in late
July and early August.
Senator Boxer. Why do you think that Mr. Skilling would
have fired you?
Ms. Watkins. I look at his actions, rather than listen to
his words. I mean, I've learned on August 21 that Mr. McMahon
went to Mr. Skilling with some very serious concerns. I've seen
the notes from the House testimony. He talks about Andy wearing
two hats, that his compensation from LJM could be quite high.
His testimony is that Mr. Skilling said he would fix it.
Well, there is no evidence that he ever fixed it. In fact,
he put Mr. Ben Glisson in charge of, sort of, guarding the
henhouse, and that was letting two foxes in the henhouse.
Senator Boxer. So you figured because of what had come
before, that had you gone to Mr. Skilling with this very simple
statement that you made----
Ms. Watkins. I----
Senator Boxer. By the way, do you stand by that despite
what----
Ms. Watkins. I do. I believe that Mr. Andy Fastow would not
have put his hands in the Enron candy jar without an explicit
or implicit approval to do so by Mr. Skilling.
Senator Boxer. Okay.
Mr. Skilling, you didn't have written testimony, but I took
some notes, and your opening statement was extremely
compassionate to the employees. I want to show you a tape--and
I believe we have it ready to go--which was a meeting that took
place in 2000. December? Is that the right date?
Recorded Voice: I'll be honest with you guys----
Senator Boxer. 1999.
Recorded Voice: [Inaudible]. Employees eligible for the
employee referral program, and I don't know why they can't be.
I don't know that that was ever determined. So I would say,
yes, they are, absolutely. [Inaudible.] Should we--listen to
this--should we invest all of our 401(k) in Enron stock?
Absolutely. Don't you guys agree?
Senator Boxer. Okay. So that, at the end of 1999, you
agreed, by laughing and shaking your head, that the employees
should, in fact, invest their money in Enron. I think anyone
seeing that would say that you were nodding in agreement.
Why is it that you had begun unloading your stock pretty
heavily before that date, and yet led the employees to think
they should keep buying stock?
Mr. Skilling. Ms. Senator, I have been a major shareholder
in Enron Corporation. I am currently a major shareholder in
Enron Corporation. Enron Corporation has constituted virtually
90 percent of my net worth from the entire time that I worked
for the company. I was a strong believer in Enron Corporation.
Now, you can take the videotape to mean what you want it to
mean. I was a supporter of Enron Corporation.
Senator Boxer. Yes, but----
Mr. Skilling. I believed----
Senator Boxer [continuing]. How much had you unloaded by
that point?
Mr. Skilling. The term ``unloaded'' I think is a little bit
of a----
Senator Boxer. Well, I'll say it in a more direct way. How
many shares had you sold up to that point? How much of your own
money had you pulled out of that stock at the time that you
shook your head and said yes to the question, which was,
``Should we buy--put all of our money--all''--and you know what
happened to those people. They lost everything. You had a
chance to be honest with them, and you shook your head, yes.
How much, in your recollection, had you already sold?
Mr. Skilling. As I--you know, obviously, I feel terrible
about what happened to the employees. I think if you--if you--
if we want to do a dueling videos, also there's a videotape of
an employee meeting two months later where I go, in pretty
excruciating detail, what some of the issues are that the
company is dealing with. I think I was open to employees, and I
think as long as I was----
Senator Boxer. Okay, but you don't have the answer, so let
me put it in the record. In 1999, the same year that tape was
recorded--and you can look at it over and over again--you
agreed----
Mr. Skilling. I thought you said it was 2000.
Senator Boxer. This was in 1999--the end of 1999. By 2000--
--
Mr. Skilling. You're saying this is December----
Senator Boxer. Yes.
Mr. Skilling. December 1999?
Senator Boxer. Yes. I'll just put it in the record because
my time is up.
[The material is not available.]
The insider records show you had sold more than 513,000
shares of Enron for $22 million at a time when you were nodding
in agreement for those people to put everything in their 401(k)
into the company. I just want to get that in the record.
Senator Dorgan. Senator Breaux.
Mr. Skilling. Excuse me. May I--I would like to see the
basis for that number. You're saying in the year 1999----
Senator Boxer. Yes.
Mr. Skilling. I sold 500,000 shares of Enron stock?
Senator Boxer. Yes. We have the records, sir. We'll send
them over to you during the----
Mr. Skilling. Right, and then we'll send you records, too,
because I believe that that number's incorrect.
Senator Boxer. Okay. We'll show you the records.
Senator Dorgan. Senator Breaux.
Senator McCain. Could I ask----
Senator Dorgan. Senator McCain.
Senator McCain. Isn't it true that in the year 2000, you
received $5.6 million as a bonus; and in 1999, $3 million as a
bonus; in 1998, $2.25 million as a bonus?
Mr. Skilling. I don't recall.
Senator McCain. You don't recall what you received as a
bonus? $5.6 million?
Mr. Skilling. I don't recall. I'm sorry.
Senator McCain. Thank you, Mr. Chairman.
Senator Dorgan. Senator Breaux.
Senator Breaux. Boy, I would have remembered mine.
[Laughter.]
Senator Breaux. Thank all of you for being with us.
Mr. Skilling, you said in your testimony that you are
somewhat of a business history buff. Can you think of a bigger
mess in business than we have here with the Enron situation in
recent history?
Mr. Skilling. In recent history? Or do you want me to go
back in time? I think there have been a lot of times when there
have been panics that have led to cascading problems in the
economy, and I think you see some of the signs of that starting
to happen here, as well.
Senator Breaux. But I mean by any measurement. This one of
the biggest and largest business failures in terms of the size
of the company and the number of people that have been
affected, that I can certainly remember. I'm not a business
history buff, but it seems to me that----
Mr. Skilling. I just don't know, Senator.
Senator Breaux. Well, I think it's the biggest mess we've
had in business failures in a long time because of the extent
of the failures and the number of people and the number of
states that have been affected by it and the fact that it's the
subject of every talk show in this country today. I mean, we've
got a mess on our hands, and how we handle it, I think, is
incredibly important.
I'd like to ask you--I mean, Monday morning quarterbacking
is generally not a good thing to participate in, but in this
case I think that perhaps it could be helpful. You made a
number of statements, Mr. Skilling, about, ``I don't remember.
I relied on advice of attorneys. I relied on the advice of
Arthur Andersen,'' et cetera, et cetera, while you were
President, Chief Operating Officer and CEO of Enron. Looking
back at all of this, can you tell the Committee what you would
have done differently during your period in those various
positions?
Mr. Skilling. Well, it--you know, I've said before--I've
gone back and tried to think what I would do differently, given
the facts I had at the time. And I--you know, quite frankly,
I--there's nothing I can come up with and--that I would think
I'd do different, given the facts I had at the time. That--
obviously, there have been a whole lot more facts subsequent
to----
Senator Breaux. Well, can't you look back and say, ``Look,
I would have instituted a system to make sure that--as the
Chief Operating Officer--that I was given the facts''? You
know, it's one thing to say that, ``I didn't get the
information that I should have.''
Mr. Skilling. Yes.
Senator Breaux. But as Chief Operating Officer, isn't it
your responsibility--or CEO or President--to set up a mechanism
to ensure that, in fact, you did get the information? It's not
enough, I think, to say, ``They didn't tell me.'' Why didn't
you have a system that assured you, as Chief Operating Officer,
that you were informed?
Mr. Skilling. I believed we had a good control system in
place. In fact, I think if you compare the number of people
involved in our control system, the reporting structure for
that control system, I think you'll find that it is far more
invasive than any other company that I'm aware of. The company
spent a lot of time on controls. It turned out that something
went wrong.
And in retrospect, what I wish--you know, in retrospect, I
wish I'd never heard of LJM. And--but at the time, with the
facts we had, the information we had, it looked like something
that was in the interests of our shareholders.
Senator Breaux. You mentioned that Enron's failure was due
to a classic run on the bank type of situation that had
developed. It seems to me if that's true, that you were one of
the major contributors to the run on the bank by your abrupt
resignation, and the selling of $66 million worth of stock
during a period when you were running the company and claiming
the stock was undervalued. As the Chief Operating Officer, you
were selling huge amounts of stock while you were telling the
general public and Enron employees that the stock is really
undervalued.
Were you not contributing to the so-called run on the bank
at Enron by your actions in selling your own stock and abruptly
resigning?
Mr. Skilling. We've talked about the reasons for my
abruptly resigning. I resigned--I don't know that most people
would characterize it as abrupt, but I resigned for reasons
unrelated to Enron Corporation.
And so, in retrospect, you know, I've made clear that when
this thing broke out, when we started to see the drain of
liquidity in the company that occurred after, I believe it was,
October 23, I called Mr. Lay and offered to come back to the
company at no compensation to do what I could, if I could do
anything, to help remedy the situation.
Senator Breaux. Ms. Watkins, thank you for being with us.
You mentioned in the memorandum, the seven-page memorandum that
you had sent out, that you were incredibly nervous ``that we
will implode in a wave of accounting scandals.'' I guess what
I'm trying to figure out, did you think that the accounting
structures that the company had entered into in all the
offshore investments, the special purpose entities--if you read
where they were located, it sounded like you were reading the
United Nations' roll call or something. They were all over the
world. Were you saying, when you suggested accounting scandals,
that the structures themselves were illegal they way they were
set up? What were you saying when you were talking about
accounting scandals? I think that Mr. Skilling would say that
Arthur Andersen said all these things were appropriate and
proper and legal. So, what were you talking about when you
talked about accounting scandals?
Ms. Watkins. My concern was with the Raptor special purpose
entities. Enron did use a number of offshore special purpose
entities in structuring its international assets. I think those
are fairly legitimate. Quite often it was to give us all kinds
of alternatives--if we ever decided to sell the asset, that we
had a subsidiary that might appeal to a European buyer or a
U.S. buyer or an Asian buyer. My concern was with the Raptor
special purpose entities.
And the problem that--when any company has doubts about
whether or not it has manipulated its financial statements, it
goes through a severe crisis. Waste Management had such a
similar problem. But with Waste Management, if they're rolling
down your street and picking up your garbage, you don't mind
that they might be in financial trouble. You still pay them the
monthly fee.
Our problem was that 90 percent of Enron's business was
primarily trading, and that business could dry up in a
heartbeat if our trade counterparties were not completely
certain of our financial health. The problem is that a customer
doesn't know whether they're going to owe us money or we're
going to owe them money. It all depends on future gas and
electricity prices. So that's why I felt we were particularly
vulnerable to a financial accounting scandal.
Senator Breaux. Did you think that the structures, in
particular, the Raptor structures, were improperly set up, or
were you concerned just about the risk it had put Enron at by
participating in them?
Ms. Watkins. My opinion was that it was--it could not be
appropriate. I did vet my concerns with Mr. James Hecker, a
former mentor of mine at Arthur Andersen. I spoke to him for
approximately 48 minutes on August 20. I hadn't been in
accounting for about ten years, so I wanted to make sure that
the accounting rules hadn't changed materially since I was last
in accounting. And his words to me were, ``Any accounting
treatment must be clearly defensible if fully exposed.'' And I
felt like these Raptor transactions, if fully exposed--if fully
explained to an investor, they would be horrified.
Senator Breaux. And that's what you conveyed to Mr. Lay?
Ms. Watkins. Yes, and I also participated in a three-hour
interview with Vinson & Elkins on September 10. Their interview
notes from that were part of the documents released by the
House. I've reviewed those notes. And in my opinion, Vinson &
Elkins understood my concern about the crisis facing the
company.
Senator Breaux. My final point is that it seems to me
before all of this you had some of the finest and wisest
advisors in the world working at Enron. Arthur Andersen's
reputation prior to this certainly was excellent. The law firm
of Vinson & Elkins has the same type of reputation. I just
can't figure out how, with those advisors, not telling folks at
Enron that, ``Hey, you can't do this'' seemed appropriate.
You're paying them a lot of money to give you the best advice
possible, and either they were not giving you the best advice,
they were totally wrong, or they were so much part of Enron's
culture that they were part of the problem, too. I'm not sure
which it is.
Thank you.
Senator Dorgan. Senator Carnahan.
Senator Carnahan. Thank you, Mr. Chairman.
Mr. Skilling, Ms. Watkins just testified that you always
look to the market for guidance. If so, why didn't the fact
that the value of Enron stock had dropped by 50 percent not
strike you as a problem? And how could you think that Enron,
under those circumstances, was perfectly healthy when you left
the company?
Mr. Skilling. Well, Senator, I was, you know, clearly aware
of the drop in the stock price, but there are things other than
a drop in the stock price to make difference. I mean, the
reason the stock price dropped--there were basically three
reasons.
The first one was that the collapse in optical fiber stock
started in March--February and March of the year 2001. We were
viewed as a player in that optical fiber business, and that
immediately hit our stock. The second thing was the litigation
and temperature related to the India power facility, as I'm
sure you've all heard, was growing in ferocity, and there was a
great deal of controversy and noise about that, which also hurt
the stock. And then the last thing, which I think probably was
also important, because of the California power problems, there
was a fear that the wholesale markets might put in price caps
and re-regulate the natural gas industry, and I think that was
viewed as negative for Enron in the long term.
Now, all of those things being said, on the inside, having
looked at it, we made some tremendous progress in that time
period. First of all, the broadband business, we had staunched
the flow. You know, by the time I left, in August, we had
significantly reduced the capital budget. We had redeployed a
lot of people out of the business. So we had reduced the burn
rate, and we felt we could wait it out--you know, that we could
wait out this problem in the broadband business.
The India problem--the Prime Minister from India was
visiting the United States in September, and there was some
thought that he might offer a resolution of that problem that
would be acceptable to Enron.
The third thing was that our wholesale business, which is
really the core of our business, had had the best quarter in
history. I mean, the wholesale business was doing extremely
well and, from an earnings standpoint, just was extremely
profitable.
So the outside world, I think, was seeing broadband, was
seeing India and potential regulatory issues. What we were
seeing inside is that we had solidified a lot of our
businesses, and our core businesses were extremely strong.
Senator Carnahan. But how could you say that the company
was in good financial condition when you left, under those
circumstances?
Mr. Skilling. I felt that having made the changes that we
made in the broadband business, the strength of the wholesale
business, the fact that we were potentially going to be
resolving the India situation--all of those things made me feel
that the company was in good shape. And I believed, when I left
on August 14, that the financial statements of the company were
an accurate representation of my understanding of what the
financial condition of the company was.
Senator Carnahan. When you left, you never really gave a
credible explanation--when you left in August. You claimed that
you believe that the company was in sound financial condition
at the time and that you simply left for personal reasons.
Frankly, I don't find that a convincing argument. You had spent
a decade working your way up through the company to this
pinnacle of power. And yet, on August 14, just six months after
you became CEO, you abruptly resigned. It looks suspiciously as
if you realized that the company was coming apart, and you
jumped ship.
Can you offer this Committee some explanation of what
changed in your personal life in August that made you so
determined to leave this dream job? Why did you not resign in
June? Why did you not wait until October? Why was this the date
selected?
Mr. Skilling. I had personal reasons. You may not find them
credible, but they are the reason that I left Enron
Corporation.
Now, you say it was the perfect job. To be quite frank, I
was tired. I was flat-out tired. This may be a perfect job for
some people. It was not the perfect job for me. And there were
a lot of people in the company that knew that I was tired and
that this was not something that was particularly important.
I had issues in my family that were more important for me.
I mean, I had spent, as you said, the last ten years of my
life--I think most people at this table will tell you that my
car was there first thing in the morning, and my car was the
last car to leave at night--I had spent ten years working very,
very hard to build this company, and I had missed a lot. I had
a clear imbalance in my priorities in life, and I had neglected
some things that needed to be dealt with at that time.
That is the reason I left the company. I did not leave the
company because I thought the company was in imminent financial
danger.
Senator Carnahan. I have one other question. Mr. Skilling,
I'm perplexed by your purported recollection of the meeting
that you had with Mr. McMahon in March of 2000. Mr. McMahon
claims to have told you that he could not continue to work with
Mr. Fastow without compromising his integrity. You said that
you believed that this was a conversation about compensation.
If an employee comes to you and says that his compensation
would be higher if he compromised his integrity, doesn't this
set off some alarm bells for you? Why did you take no action to
rectify the fundamental conflict that was raised by Mr.
McMahon?
Mr. Skilling. There is no time--no time when I've been at
Enron Corporation when I have asked anyone to compromise their
integrity. It just doesn't happen.
My interpretation--and again, this is just, you know, two
people remembering a meeting--a half-an-hour meeting two years
ago--my recollection is that Jeff said that he was concerned
about the conflicts that were in place as it related to his
personal situation, and he asked me for my support for him, and
that, if I did that, he was comfortable doing what he needed to
do to maintain his integrity. And that's my interpretation of
it, Senator. It was a long time ago.
Senator Carnahan. Well, according to Mr. McMahon's notes,
he--as his talking points to you, he says, ``I find myself
negotiating with Andy on Enron matters and am pressured to do
deals that I do not believe are in the best interests of the
shareholders.''
Mr. Skilling. Yes, and I've seen this note, and I think
there are two pieces on this page. The first piece is, Jeff
relates to an untenable situation. And I am sympathetic to the
untenable situation. And he says, ``Here are the requests or
options.'' And there were two options that Jeff presented in
this paper.
And again, I don't specifically recall this discussion. I
just recall my impression or interpretation of what occurred in
the discussion. But request for option number one was, ``In
order to continue to do this, I must know I have support from
you and there won't be ramifications--believe it already has
affected my compensation--or need to let me out of the
situation and move to a different job.'' I personally--there is
no question, given those two alternatives, that I would have
suggested to Jeff that I would support him in any way possible
for him to carry out any belief--any ethical duties or beliefs
that he had as an individual.
I mean, that just--I don't think--I don't think my
description of that session or that meeting is at all in
conflict with Mr. McMahon. I think we both came out of it--I
felt that we had discussed it, and I felt that we had resolved
the issue, and I had called people to help resolve the issue.
And Mr. McMahon did not come back to me subsequent to that. Mr.
Glisson did not come to me and say that they were having a
problem.
As Ms. Watkins points out, Mr. Glisson, as it turns out,
had an equity interest in one of the structures. I was not
aware of that--I mean, absolutely not aware of that. So I would
have expected, if Mr. Glisson had any concerns about any
operation of the Global Finance group that he would have come
to me, as well, and we would have sorted it out.
Senator Dorgan. The time of the Senator is expired.
Senator Carnahan. Thank you. I just fear that you reduced a
conversation about character to a conversation about money, and
that was my concern. I'm concerned that the bankruptcy of this
company does not compare with the bankruptcy of character that
occurred in the executive suite.
Senator Dorgan. I thank the Senator.
The Senator from Virginia.
Senator Allen. Thank you, Mr. Chairman. I'd like to follow
up on Senator Burns' and Senator Breaux's very logical,
commonsense statements and questions of you all so that we can
maybe draw some conclusions here on what ought to be done in
the future to prevent this. I'm not sure you can prevent bad
business judgments, but at least let people understand and know
what sort of investment they're making and assess for
themselves the risks of various corporations in which they may
wish to invest.
Now, Ms. Watkins, I'm not going to ask you for a legal
conclusion, but do you believe that Enron engaged in accounting
practices which, in effect, whether by design or otherwise, hid
expensive or underperforming investments from investors by
keeping these liabilities off the books?
Ms. Watkins. My concerns were primarily with what I saw as
income statement manipulation. I believe, in the memos that I
gave Mr. Lay, I was concerned that Avici within Enron Broadband
and the New Power Company, was hedged. That was an Enron Energy
Services investment. By hiding the losses that those business
units were achieving--or having occurred in those stocks, it
made those two business units look more profitable for a longer
period of time. It let us enjoy a very large multiple, because
those were our growth businesses, for a longer period of time.
And I believe investors were hurt by those income statement
manipulations.
Senator Allen. Now, Mr. McMahon, per Ms. Watkins' memo, did
you have any concerns regarding Enron's accounting practices
and the use of these special purpose entities to move assets
off Enron's balance sheet and, thereby, hide the debt
obligation or the profitability of the company from investors?
Did you have concerns about that?
Mr. McMahon. When Ms. Watkins showed me her memo, actually
the items in there I was unfamiliar with, but the allegations
that she made in that memo were concerning to me, and I
encouraged her, as others did, to see Mr. Lay about it.
Senator Allen. At any point in this whole matter could
anyone have stopped this from becoming a full-blown
catastrophe?
Mr. McMahon. That's a difficult question. I think it goes
back toward really what caused it and how could it have been
prevented. And I became CFO of the company on October 24, when
Mr. Fastow left the company, so my perspective is somewhat
limited here, but I would probably echo both Mr. Skilling and
Ms. Watkins' testimony in that I think there was a big
liquidity draw. I'm not sure what the cause was. I think
there's still a lot of facts that are yet to come out about
what happened at Enron and what the cause was.
But as--from my perspective, as a finance person, I saw a
balance sheet--or a financial condition that was fairly weak
and couldn't withstand much stress, and it was getting an awful
lot of stress in the market at that point in time.
Senator Allen. Mr. Skilling, in your testimony, you said
you relied on the advice of attorneys and accountants who told
you that these special purpose entities and activities were
appropriate. In other words, they were technically legal.
But again, let's get to the lessons learned. Mr. Skilling,
do you actually think that during all of this, the true
financial condition of Enron was being accurately reported?
Mr. Skilling. First of all, I think you've made a
suggestion or an insinuation that there might have been
something illegal.
Senator Allen. I'm not saying it was illegal. Let's assume
that everything, as far as accounting practices, auditing, and
counsel was technically legal. Assuming that's so, were
investors who were thinking to invest and maybe did invest in
Enron stock getting a true picture of the financial condition
of Enron?
Mr. Skilling. I believe the financial statements were an
accurate representation of my understanding of the financial
condition of the company.
I'd like to address--as you brought it up, I'd like address
one of those issues. There's been a lot in the press, and I
think your question suggests, that there's some issue of hiding
debt, that--the use of off-balance sheet or special purpose
entities had its intent in hiding debt. And all I can do is--I
can refer you to page 78 of the year 2000 10-K. There's a
section that's called ``unconsolidated equity affiliates.''
Unconsolidated equity affiliates would be partnerships and
special purpose entities that were not consolidated into
Enron's balance sheet.
There's a two-page description of the earnings that were
appropriate--or associated with those vehicles. And on the
second page----
Senator Allen. Alright, let me interrupt.
Mr. Skilling [continuing]. It shows the full balance
sheet----
Senator Allen. What----
Mr. Skilling. Senator, please.
Senator Allen. I just want--I want you to----
Mr. Skilling. This chart shows exactly--exactly what the
total amount of the outstanding liabilities were that were non-
consolidated liabilities. So the whole issue of hiding debt,
it's not an--it was in the 10-K. Anyone reading the 10-K would
have a hard time missing this page.
Senator Allen. Okay. Thank you, Mr. Skilling. A lot of
people must have missed it.
Now, to all three of you all----
[Laughter.]
Senator Allen [continuing]. What changes in law would any
of you suggest--whether it's SEC regulations or rules, whether
it's accounting or auditing standards--that would give
investors better information?
Mr. Skilling. Again, I think to the extent that we in
management and shareholders relied on our professional
accountants, to the extent that we were not getting accurate
information from the accountants, for whatever reason, I think
that certainly is worthy of investigation by this group.
I also believe that this group should look into this issue
of liquidity and how that happened, because there was a
serious, severe liquidity drain. And I think a lot of it was
imbedded in these derivative contracts in the standard--is the
forms that I think just--I don't think that's a real good idea.
I think we've got a systemic problem that's come in the
last 10 or 15 years in this country, and we're now starting to
see it spread. I mean, now they're going after IBM. They're
going after GE. They're going after Computer Associates.
They're going after Qwest. And it's okay to go after them and
challenge their accounting. That's okay. But if, by doing that,
you set off a chain reaction, a nuclear reaction, that drains
liquidities from these companies, ultimately a lot of people
are going to get hurt.
And maybe we can look at Enron as the canary in the mine
field--or the coal mine. You know, they used to bring a canary
down to see if there was--yeah. Maybe that's the issue, you
know, and something that people ought to be looking at. I
personally--I'm concerned about it.
Senator Allen. Ms. Watkins.
Ms. Watkins. My personal opinion, as an investor in the
U.S. stock market, is that the accounting firms and their
clients have grown too cozy. And I understand there are
proposals to limit the amount of auditing and consulting work.
But my personal opinion is that I would feel better if public
companies were required to rotate their accounting firms for
periods as short as every three years.
Mr. McMahon. I like--I think--if there is an issue, I think
that's something that certainly ought to be--three years might
be a little bit tight, but----
Senator Allen. What about information, as far as these off
balance sheet transactions?
Ms. Watkins. I think that certain of the special purpose
entities that are off balance sheet that have any kind of call
back to the company that is of any significance--for instance,
right now I think it is a very legitimate structure to pledge
your stock as a backstop. You push assets off. You've got debt
that should be non-recourse just to those assets in a special
purpose entity. But it is currently acceptable to also put a
call back into the company's stock and still have that be off
balance sheet, and I think that rule needs to be looked at.
Senator Allen. Mr. McMahon, do you have any suggestions of
improvements to inform prospective investors?
Mr. McMahon. Again, not speaking of any particular company,
Enron or not, I believe financial statements are very difficult
to read right now. I think it stems from management's
discussion and analysis, recurring and nonrecurring earnings,
off balance sheet items scattered about the footnotes,
guarantees, other places. If I were to recommend anything to
this Committee, I would suggest some form of mechanism to
improve and actually expedite the investor's ability to read
and understand financial statements.
Senator Allen. Thank you, Mr. Chairman.
Senator Dorgan. Thank you.
Senator Nelson.
Senator Nelson. Thank you, Mr. Chairman. I want to take the
discussion, Mr. Chairman, in a different direction.
There were some 33 public pension funds that had a
considerable loss as a result of the fall of Enron's stock, but
one in particular that is my state, suffered the loss when the
stock was dropping. I'd like to go back to the statement that
both of you, Mr. Skilling and Ms. Watkins, testified to, that
you thought that the problem was a run on the bank, the fact
that the stock was dropping because banks were calling the
loans, and you pointed out this material adverse change, or
MAC.
So, on the basis of what you said, then it would seem--and
also, I think you said something to the effect, Mr. Skilling,
that if the company had had time, it would be okay. So the idea
would be, as the stock was dropping, there would have been
clearly an incentive from the corporate executives or Board
members to want to get the stock price back up so the banks
would not call in their loans.
So, as we're trying to get into this Florida situation,
what I'd like to know from any of you, do you have any
knowledge of any communication from the company, from its
executives, from Board members, to any institutional investors,
including Florida and the Florida Retirement System that said,
in effect, ``Help us. The company is going to be okay. Buy the
stock now so it will get the price back up.''
Let's start with you, Ms. Watkins. Do you have any
information?
Ms. Watkins. My concern was with how we fell so fast into
bankruptcy has less to do with the stock price and more to do
with our trade counterparty payables. We had approximately $16
billion of receivables on our balance sheet as well as $15
billion of payables. The problem that you have with uncertainty
about our future financial health was that, on the liability
side, those customers closed out their contracts--a number of
them did--and demanded payment, and several billion dollars
went out of the company in a very short period of time.
The only way to combat that is to quantify to the investing
public what our problem is. What I wanted to see happen is that
we would restate, come clean, explain our problems, accrue a
large liability on the balance sheet for shareholder
litigation--quantify the size of our problem for the market so
that it would become comfortable that we had a life ahead of us
and that they would, you know, cease to close out--or seek to
close out the commodity trade payables with us.
Senator Nelson. Thank you for your opinion. Did you have
any information of any knowledge, any information, any
communication being shared from Enron, its officers, its
principals, its Board members to institutional investors to
buy?
Ms. Watkins. No. No, I don't think so.
Senator Nelson. Mr. Skilling.
Mr. Skilling. Senator, I left the company on August 14, so
I wouldn't know what happened.
Senator Nelson. Yes, I understand.
Mr. McMahon.
Mr. McMahon. I have no knowledge of that kind of
communication either.
Senator Nelson. Did you know a fellow named Frank Savage,
Mr. Skilling?
Mr. Skilling. Yes, sir. Mr. Savage is a Board member. I
don't know if he's--I guess he's not a Board member now, but he
was a Board member of Enron Corporation.
Senator Nelson. Were you aware that, back in August--up
until about August, that he was a principal and officer in one
of these outside money-management firms?
Mr. Skilling. I can't tell you which one, but, yes, I
believe he was in the money-management business.
Senator Nelson. Tell me about some of these partnerships.
At one point, you all were not only going to finance energy,
but you were looking into other commodities, including water.
What was that all about?
Mr. Skilling. Well, there were basically two businesses in
Enron--three businesses in Enron. There were, kind of, the
regulated businesses. There was our international development
business. And there was our merchant business, our wholesale
business. The rates of return on assets in the international
business were not compensatory, and so we were trying to reduce
the size of that business.
There was a team of people on the international side that
believed that there was an opportunity to do much the same
thing, but more profitably, in the water business. And so it
was discussed with the Board that this would be an alternative,
and we went into that--we decided to try that business.
Senator Nelson. And was there a fellow named Kinder that
headed up that subsidiary for Enron?
Mr. Skilling. No. Rich Kinder was President before I was
President of Enron Corporation. The person that headed up the
water business was Rebecca Mark.
Senator Nelson. And what was that water business, as it
originally related to Florida and the Everglades restoration?
Mr. Skilling. Oh, I don't know, sir. I was--actually, I was
on the Board of the Zurichs, and I can vaguely recollect that
they would share with us a number of different projects that
they were interested in and that they were pursuing, and I--you
know, I vaguely remember something in Florida, but I don't know
the specifics.
Senator Nelson. So going back to my original question, I'll
conclude with this, Mr. Chairman. With regard to any
communication, whether you were at the company or not, your
testimony is that you know of no communication from the
company, under the conditions in which the stock was dropping
in October, to purchase the stock by outside investors--in
particular, institutional investors. Is that the testimony of
each of the three of you?
Mr. Skilling. Yes.
Ms. Watkins. Yes.
Mr. McMahon. Yes.
Senator Nelson. Thank you, Mr. Chairman.
Senator Dorgan. Senator Hutchison.
STATEMENT OF HON. KAY BAILEY HUTCHISON,
U.S. SENATOR FROM TEXAS
Senator Hutchison. Thank you, Mr. Chairman. I apologize for
being so late. I was the author of a bill called Transitions to
Teachers and had an event with the First Lady this morning to
announce a program in the District of Columbia. So I'm very
sorry.
But I am advised by my staff that several of the questions
that I had have been asked already, so I'm going to try not to
duplicate questions. I would like to focus somewhat on where we
are now and on the future, Mr. McMahon, since you are in charge
now.
I have met with the Enron employees, and I've heard their
concerns. Certainly I've listened to much of the testimony from
other hearings, but this is my line of questioning today. And
it is, what is the company doing now with regard to the
employees who were not able to get even their severance pay?
Obviously, you have given retention bonuses to people to
keep them, and that's not an illegitimate thing to do to try to
keep the company going. But thousands of people were not even
able to get the severance pay to which they were entitled under
the company rules. They have no standing in court, I'm told,
because they are the very last in line as an unsecured
creditor.
Is the company going to try to give the severance pay that
is owed to the former employees? Is that even on your radar
screen?
Mr. McMahon. Well, there's no question. I think what's
happened to, obviously, the former employees is a tragedy, and
we are very concerned about that. The ability for the company
to pay any amounts under severance is a matter of law. It's in
the bankruptcy court, so it's not necessarily within our
control.
We are looking at, from a legal perspective, what options
we have and what ability we have to make some type of severance
payments to the employees. That work is ongoing currently as we
speak. That would ultimately have to be discussed with the
Creditors Committee, as well, and then that would have to be
approved by the court.
So it's a process that's not completely in the company's
control. And as I understand it, as we've advised from the
legal counsel, the severance plan that Enron had terminated
upon the bankruptcy. And that's what has prevented us from
making payments to the employees, as I understand it. And so we
are exploring all the options we have, now that we're under the
bankruptcy rules, to try and do something for these employees.
Now, above and beyond severance, we are holding some
programs in Houston for job fairs and what-not, so we're doing
everything we can as an institution, short of making these
payments, which, at this point, we're prohibited from making.
Senator Hutchison. But you are looking at a possibility of
trying to keep that commitment, if you can get the other
creditors to work with you in the bankruptcy court?
Mr. McMahon. Yeah----
Senator Hutchison [continuing]. To those who were
terminated by the bankruptcy?
Mr. McMahon. Correct. The way I would characterize it is,
we're exploring all the options that we have as a company,
under the bankruptcy laws, to be able to make severance
payments. And once we finish that legal work, the analysis,
we'll bring it to the Creditors Committee with a
recommendation. But unfortunately----
Senator Hutchison. Are you going to make an effort to try
to put them in a first-in-line situation rather than a last-in-
line situation?
Mr. McMahon. Well, again, unfortunately that's a bankruptcy
law question which I can't control. What we are trying to do is
to----
Senator Hutchison. But are you going to try to do that? Is
that what you want to do if it can be done legally?
Mr. McMahon. Absolutely. We want to do everything we can do
for the former employees who were severed as part of this
process. And unfortunately, we're in the box of working through
the bankruptcy process, and we're going to have to do that.
Senator Hutchison. Well, let me ask you this. How many
employees were let go before the filing of bankruptcy?
Mr. McMahon. I'm not sure if I understand your question.
The vast majority of the employees were let go a day or two
after the bankruptcy.
Senator Hutchison. Is there anyone else on the panel who
could tell me if there were a number of employees who were
severed before the bankruptcy, that might have a better case
for the company to meet their commitment? Does anyone else on
the panel know?
Ms. Watkins. I'm not really aware, but I think, as Mr.
McMahon points out, that there were--and Mr. Skilling, as
well--there was some downsizing going on in the broadband
group. Those people, if they still have outstanding severance
payments, I guess, would have a claim in the bankruptcy estate
for those payments.
Senator Hutchison. But the company would have the ability
to meet its commitment if they were severed before the
bankruptcy? Or did bankruptcy eliminate all of your options?
Mr. McMahon. Unfortunately for those employees, the
obligation--they were--anyone severed prior to the bankruptcy--
again, as I understand it; I'm not an attorney--but they have--
since the severance plan was active when they were terminated,
they are due their severance. The bankruptcy, though, puts them
as a general unsecured creditor, and all those obligations
right now are stayed as part of the bankruptcy, as any other
obligation for Enron is.
Senator Hutchison. Let me ask you, I'm not sure if anyone
asked this before, but I have introduced a pension reform bill
that includes more transparency and more information to
employees, but does not discourage companies from offering
401(k)s, because I think 401(k)s are a great vehicle for
retirement security for millions of Americans. But my bill also
addresses the issue of auditing and consulting.
And I was general counsel of a bank holding company, and it
was just a policy that we didn't have the auditors also giving
us consulting advice. And I just wanted to ask you--also you,
Mr. Skilling--if you think that we ought to pass a law that
would prohibit that mix as a conflict or potential conflict.
Mr. McMahon. I think the relationship between audit
clients, from an independent audit perspective, as well as
separate accounting consultation, is something that I think
that the Senate should look at, frankly. It would appear to be
a conflict from the outset. And how that conflict is managed
between the firms is probably something that should be
reviewed.
At Enron, going forward, we are looking to institute some
best practices in a variety of places. And this is one where
we're looking. Obviously, we're in need of new auditors. We've
replaced our accounting personnel internally, as well. And we
want to go forward with something that's best practices. So
we're, as an institution, looking forward to that, as well.
Senator Hutchison. Are you, in your company, doing what
several other companies are doing voluntarily, are you going to
make a policy not to have the same firm do your auditing
function and your consulting?
Mr. McMahon. We're unfortunately not that far in the
thought process, because we don't have auditors yet. And
actually, the person who we just put in charge of our
accounting has only been doing it for a week or so. But, the
thought process we want to go through is, what type of areas,
going forward as a new company, as a reorganized company, can
we have best practices?
Senator Hutchison. Do you have an opinion, as the CEO of
the company? Are you going to make a recommendation to the
Board on that subject?
Mr. McMahon. My personal opinion, at this point in time--
and this is subject to, I think, a lot of internal discussion
as well as external. Ms. Watkins testified earlier that auditor
rotations is something that she recommends, and I tend to fall
in that camp as well. Every X amount of years it probably makes
sense to bring in a new set of eyes and look through the books.
One area that I think Enron historically could have done
better is--as I understand, we outsource most of the internal
audit function to our external auditors. And I think on a go-
forward basis, that's not something I would recommend either.
As far as consulting, if you change over your auditors every
couple of years, maybe that's not as big of an issue. So that's
the kind of discussion we're going to have internally.
Senator Hutchison. I know my time is up. Could I just ask
Mr. Skilling and Ms. Watkins or anyone else to address that
last question?
Ms. Watkins. What I've said previously is that I would like
to see public companies rotate their accounting firms for
periods as short as once every three years. I think the largest
deterrent to problems such as what Enron has faced is another
pair of eyes--a second, you know, look. You are likely to be
more conservative and less aggressive in the accounting
treatments you adopt when you know another accounting firm is
going to be taking over your client and your work in less than
three years.
Senator Hutchison. You think rotating alleviates the need
for the division between the firms doing the consulting and the
auditing?
Ms. Watkins. Yes, I do.
Senator Hutchison. Mr. Skilling.
Mr. Skilling. I agree with Ms. Watkins. I think there are a
lot of efficiencies--or at least I think the accounting firms--
Jeff and Sherron both work for accounting firms, so I'm not as
familiar with them, but the argument they've made is that if
you can do consulting and the auditing, it's much more
efficient, because the people know what's going on. And so I
don't know that that's a huge problem, but I would agree with
Ms. Watkins that now, in retrospect, I think it would be a good
idea.
I think three years may be too short, because in something
like Enron, it was a huge company, and you'd have to have
hundreds of people going out and hundreds of people coming, and
I don't know quite how you'd manage that every three years. But
some sort of rotation is probably a good idea.
Senator Hutchison. Thank you, Mr. Chairman.
Senator Dorgan. Senator Snowe.
Senator Snowe. Thank you, Mr. Chairman. I'm sorry that I
was unable to be here for the entire questioning, but I've got
dual responsibilities.
Mr. Skilling, I'm interested to know what was the role of
CEO at Enron, I heard you say that you're not an accountant,
but that you relied on accountants for their advice and pretty
much presumed that they were correct. There was no skepticism
and there was no questioning. You were at Board meetings
obviously, as the CEO, you were present at the Board meetings
that had been referred to--for example, the one in February
2001. Is that correct?
Mr. Skilling. February 2001?
Senator Snowe. Yes.
Mr. Hiler. Senator, can I just--for purposes of
clarification, please, I think you indicated something about
that he may have indicated that accounting practices were not
questioned, or there was no skepticism, or as to whatever the
auditor said, and I don't believe he testified to that. I just
wanted to make the record clear, because there are a lot of
questions, as there were in the House, where there are double
premises to the questions or characterizations with which we
don't agree, and then my client is asked to answer a question
yes or no, and it unfortunately could appear that he's agreeing
with the characterization.
Senator Snowe. Well, we're just asking questions about
these particular partnerships and accounting practices, whether
it's LJM or Chewco or Raptors or whatever. So would it be
correct to say that there was any questions about them, or not?
Mr. Skilling. It would be my assumption--we had an
accounting organization of hundreds of people. I would assume
there are all sorts of questions that were asked of the
auditors about all accounting issues inside of the company.
Senator Snowe. I guess what I'm trying to understand--
because I'm having difficulty understanding how this all
worked, is what was the role of your position in the company
[inaudible]. Generally, I would presume that a Board of
Directors meeting is a pretty important event for a CEO. Is
that not correct? I mean, you had four or five meetings a year?
Mr. Skilling. A Board of Directors meeting, yes--I mean----
Senator Snowe. Right. So some of these issues obviously
were raised. I mean, some of--and you were in and out of some
of these meetings. Is that correct?
Mr. Skilling. Which issues?
Senator Snowe. Concerning some of the LJM transactions and
Raptors.
Mr. Skilling. Absolutely. As I testified, I think we talked
about the LJM structures in multiple Board meetings and
conflicts and the process we put in place. The Board of
Directors actually approved the structuring of the Raptor
transactions. So, yes, there was a tremendous amount of time
spent on those.
Senator Snowe. Okay. So you were familiar with the agenda
and what was going to be discussed at these Board of Directors
meetings. Is that correct?
Mr. Skilling. I think technically the Chairman of the Board
sets the agenda for the Board meetings. But----
Senator Snowe. Yes, but doesn't generally the CEO work with
the Chairman of the Board prior to that meeting?
Mr. Skilling. Well, typically--you know, we had committee
meetings. And then you'd have the Board meeting. I believe the
agenda for the Board meeting was determined by the Chairman of
the company. And I believe the agenda of the subcommittees was
set by--I don't know this as fact, but I believe it was set by
the--whoever the Chairman of that subcommittee was. So if you
had the Compensation Committee, the head of the Compensation
Committee would set the agenda for the meeting.
Senator Snowe. But would you go over the agenda? I'm just--
you know, for example, in some of these meetings--and I know it
might have been prior to the--I might be wrong in this, but
when Mr.--when the power went out, and you were in and out of
the room, and Mr. Fastow was making his presentation--I don't
know if it was LJM2 partnership and you were in and out of----
Mr. Skilling. It was actually a presentation proposing an
LJM3 partnership, which, in fact, never occurred.
Senator Snowe. Okay. But generally, the CEO is very well
aware of what's going to be discussed.
Mr. Skilling. I was not the Chief Executive Officer at that
time for that meeting. I became Chief Executive----
Senator Snowe. Chief Operating Officer. You're right.
Mr. Hiler. For the record, if I might, and so we're all
clear, that was also a Finance Committee meeting, I believe
that October 2000 meeting that he testified about the lights
being in and out. He was not a member of the Finance Committee,
although he may have been there. So in terms of distinguishing
that from a Board meeting, it may be important.
Senator Snowe. Okay. But, I guess the point is here that
there's a question of whether or not--to what extent you might
have been aware of the nature of these transactions that might
imperil the company. But you're generally saying you had no
awareness. Is that correct?
Mr. Skilling. No, I didn't say that. I said that, at
multiple Board meetings, we spent a lot of time--it's in the
minutes. You'll see that there's an enormous amount of time
that was spent discussing--for example, in LJM1, the actual
specifics of the transaction that was approved by the Board.
When LJM2 was approved, there was a long discussion of the
potential conflicts of interest that would be created and what
sort of process we needed to put in place to eliminate those
conflicts of interest.
In the Raptor transactions, there's--I think it's in the
Board minutes, you'll see that there's actually a Board--what
do you call it? It's a resolution, thank you--a full resolution
that actually put in place the mechanics or the structure in
place----
Senator Snowe. Right.
Mr. Skilling [continuing]. Of Raptor. So, yes, the Board
spent a significant amount of time----
Senator Snowe. And you're saying in the Raptors that you
were obviously directly involved in that, were you not?
Mr. Skilling. I was--yeah, I was in the Board meeting, yes.
Senator Snowe. Were you directly involved? I mean,
obviously, you were at the meeting.
Mr. Skilling. I was at the Board meeting, I would have been
involved.
Senator Snowe. Okay, because the Powers Report said the
Raptors were created in response to Skilling's desire to divide
the mechanism that would allow Enron to hedge a portion of its
merchant investment portfolio.
Mr. Skilling. Yes.
Senator Snowe. And you're saying that your signature was
not required for----
Mr. Skilling. Well, what the--I think what the Powers
Report is referring to, which is absolutely true, is we had a
large portion of our business was mark-to-market or fair-value
accounting. For any of the mark-to-market or fair-value
accounting areas of the company, I insisted that we hedge those
positions. And we used to have discussions about the mechanics
of hedging our natural gas portfolios, our electricity
portfolios--we got in pulp and paper, how we hedged that--our
telecommunications portfolios.
And this related to the equity investments we were making,
and I was very interested in getting a hedge on those, because
I believed that--I mean, we'd made some tremendous investments.
We'd invested--I don't even know what the number is, $40 or $50
million--and they were worth half-a-billion dollars. And so, I
was very adamant that we needed to come up with some mechanism
to hedge those.
And we looked at a couple of different alternatives for
hedging those and decided, upon discussions with our technical
people and our accountants and lawyers, that the Raptors
structure was the best one.
Senator Snowe. But I guess the fact is that you had no
question--I mean, you might have had some questions on the
mechanics and so on, but not in terms of what these
partnerships might represent--and the fact that you deferred to
accountants, with respect to their recommendation. Is that
correct?
Mr. Skilling. We looked, as the Board and management always
looks to their accountants to tell us what the accounting
structure is, as we look to our lawyers to approve whether the
contracts are correctly drafted and enforced--yes.
Senator Snowe. Well, there was an article that was written
in Fortune magazine back in December by Bethany McClain, and
she talks about a meeting--I gather it was an analyst
conversation--in which she raised, I think--she said, ``fairly
standard queries in an effort to understand fairly
incomprehensible financial statements. The response from Enron
was anything but standard. Skilling quickly became frustrated
and said the line of inquiry was unethical and hung up the
phone.''
I guess the point is, here, you relied on accountants for
their best analysis of these partnerships. Why would you
question an analyst or a reporter with respect to your
financial transactions that they may be relying on accountants
or other experts to try to understand Enron's financial
statement?
Mr. Skilling. Is what you're asking is why did I call
Bethany McClain unethical? Is that the question?
Senator Snowe. Yes.
Mr. Skilling. Um.
Senator Snowe. Obviously, she had some legitimate
inquiries. The line of questioning was unethical.
Mr. Skilling. There's--and I don't know if we want to----
Senator Snowe. And she made the----
Mr. Skilling. I don't know if we want to waste the time of
this Committee. It's----
Senator Snowe. Well----
Mr. Skilling. I am under oath in the House describing that
telephone conversation. There have been a number of things that
have happened subsequent to that, so I guess I have some
additional information. But Ms. McClain had been working on the
article--I said, in my testimony at the House, for a week. I
think she came out in Fortune magazine the next week and said,
no, that she'd actually been working on it for a month. So I'm
sorry, it was a month that she was working on it, not a week.
She called up and said that she wanted my comments as she
was finishing that article and needed 15 minutes of my time.
And as I recall, that meeting was set up--it was on a--I think
it was a Monday or a Tuesday, and we carved 15 minutes out of
my calendar, which sometimes is a very tough thing to do. So we
carved 15 minutes out of my calendar.
Ms. McClain called me and started asking some very
technical questions about our accounting. I said, ``Look, you
know, I've got 6 minutes left now before I have to leave for a
meeting, and I'm not an accountant. I think we need to get our
accounting people and our risk-management people and our
finance people together with you to describe the specifics of
what you're asking.'' And she said, ``Well, we're going to run
the story anyway.'' And I said, ``If you do that, I think
that's unethical.''
And she said that she would give us one more day--I think
either she did or our PR people followed up afterwards. And we
sent our Chief Accounting Officer, our Chief Financial Officer,
and our head of Government Relations to New York to meet with
her personally to answer. They spent, I think, a full day, or
four or five hours that day, discussing the specific questions
she had.
I believe that that was ethical at that point, to listen.
You know, not--I mean, you all, I'm sure, in your business have
been ambushed by reporters before, and this struck me as a
potential ambush. I asked them to please give us time and let
us get the appropriate people to answer the question to New
York to answer questions.
Senator Snowe. Well, I guess it gets back to the whole
issue of why none of these events raised a red flag. I think
it's just very difficult to comprehend, to be honest with you.
And, you know, these rewriting of losses--I mean, just shortly
after your departure--I mean, significant write-downs. And not
to be aware at all, in any way, at any level about the impact
of these partnerships on the financial picture of this company
is just really hard to understand. You may well say that you
didn't understand, you didn't know, you didn't realize, or
whatever, but it's such a massive scale, and I think that's the
difficulty understanding--comprehending your lack of awareness.
Mr. Skilling. Senator, I think you can go back again and
look at the dates. I left Enron Corporation on August 14. Ms.
Watkins had not yet made public her concerns. You can look at
the Vinson & Elkins interview of the head of Arthur Andersen's
account of Enron. And I think that was in early September--and
he said that it was entirely appropriate and done properly. So
the fact that I had no reason to believe that there was a
problem there is not particularly surprising, I don't think.
Senator Snowe. Thank you.
Senator Dorgan. Mr. Skilling, did you have any equity
shares or any investment in any of the partnerships that have
been discussed?
Mr. Skilling. No, I did not.
Senator Dorgan. None.
Mr. Hiler. Excuse me. I'm sorry. Could we----
Senator Dorgan. Oh, yeah. Yeah, let's all be specific.
Mr. Hiler. Which ones? LJM? Raptor?
Senator Dorgan. Did you have any investment in any of the
partnerships, the SPEs, that were affiliated with the company?
Mr. Skilling. No, I did not.
Senator Dorgan. Alright. Mr. Skilling, I've sat here now
for a couple of hours, and I'll tell you, it is unbelievable to
me what we've heard. Let me describe a bit of it to you.
You say: ``I left Enron on August 14, 2001, for personal
reasons.'' You're quoted in two different places as saying
that. Well, Mr. Lay says that he pressured you about that, and
you said that you were under a lot of pressure. Enron's stock
price was dropping, and you could not do anything about it. And
you said to The Wall Street Journal, ``I don't think I would
have felt the pressure to leave if the stock price had stayed
up.'' Does that sound like somebody who left for personal
reasons?
Mr. Skilling. Senator, I think I'd like to see Mr. Lay's
testimony, because I think it's very clear in the discussion
that Mr. Lay had with the Special Committee that I had confided
in him a number of personal reasons that were important for me,
and that's why I was leaving, and he accepted those reasons.
Senator Dorgan. Did The Wall Street Journal misquote you,
then?
Mr. Skilling. I talked to The Wall Street Journal probably
two--I think it was two days after I had left, and we had a
discussion that lasted probably a half an hour, probably----
Senator Dorgan. Is it a misquote?
Mr. Skilling. I'm sorry?
Senator Dorgan. Is it a misquote?
Mr. Skilling. I think it was a mis-context. A personal
decision takes into account many, many factors. I absolutely
can admit to you that I was frustrated with the stock price. I
thought the company was in good shape and could not--it was
bothering me that, in spite of the condition I thought the
company was in, the stock price was going down. I found that--
--
Senator Dorgan. You've told us that. But let me just say--
you said, ``I did not believe the company was in financial
peril.'' Let me read to you from the Powers Report, just a bit.
Here's what the Board of Directors, which is the best face
you're going to put on this--the Board of Directors of the
company commissioned this study. This is a best-face study.
Here's what they say: ``The partnerships [inaudible] LJM1 and 2
were used by management to enter into transactions it could not
or would not do with unrelated commercial entities. They were
designed to accomplish favorable financial results, not to
achieve bonafide economic objectives or to transfer risk. Some
transactions were designed so that had they followed applicable
accounting rules, Enron could have kept assets and liabilities,
especially debt, off its balance sheet. But the transactions
did not follow the rules. They allowed Enron to conceal from
the market very large losses resulting from Enron's merchant
investments by creating an appearance that those investments
were hedged--that is that a third party was obligated to pay
Enron the amount of the losses--when, in fact, the third party
was simply an entity in which only Enron had a substantial
economic stake. We believe these transactions resulted in Enron
reporting earnings from the third quarter of 2000 through the
third quarter of 2001 that were almost $1 billion higher than
should have been reported.''
Mr. Skilling, what is unbelievable to me is that a CEO
says, ``When I left, things were just fine,'' and, ``I have no
knowledge of any of this.'' Is it the case that you have no
knowledge that any of this was going on, that Mr. Fastow was a
renegade running off by himself? You didn't know that Chewco
didn't meet the 3-percent test?
Mr. Skilling. [Inaudible].
Senator Dorgan. Do you tell us that you were in charge of
the company but had no knowledge of this?
Mr. Skilling. Okay, let's----
Senator Dorgan. Is that what we're to believe?
Mr. Skilling [continuing]. Let's go through the specifics.
Start with Chewco. Did I know that Chewco was undercapitalized?
No, sir, I did not know Chewco was undercapitalized.
Senator Dorgan. So did someone lie to you about that? If
so, who?
Mr. Skilling. The accountants believed that it was properly
capitalized. And, as I understand it, Enron's--and this--I've
just----
Senator Dorgan. The accountants have said that they were
lied to.
Mr. Skilling. You'll have to ask the accountants. I can't
speak for the accountants. I did not know.
Senator Dorgan. But you can speak for the company.
Mr. Skilling. I can speak for myself. If you asked me did I
know----
Senator Dorgan. You were the CEO of the company. You can
speak for the company at that point.
Mr. Skilling. I can speak for myself. I can speak as Chief
Operating Officer of the company. I did not know--personally
did not know that Chewco was undercapitalized.
Senator Dorgan. Now that you know, was your exit statement
an appropriate one?
Mr. Skilling. I'm sorry?
Senator Dorgan. Your exit statement, that things were just
fine when you left Enron--was that appropriate, now that you
know what you know?
Mr. Skilling. Well, in fact, dealing specifically with
Chewco, what ended up happening is they reconsolidated Chewco.
That would have no--essentially all you're doing is bringing--
it's an accounting adjustment. It wouldn't have an impact on
cash flow or earnings.
Senator Dorgan. I'm not talking just about Chewco. I'm
talking about the Board of Directors report. The Board of
Directors report said that you were heading a company that was
reporting earnings that it didn't earn and keeping debt off the
books that, in fact, related to risk for the company.
Mr. Skilling. Mr. Chairman, all I can tell you is that the
accountants signed off that they were accurate records. I
believed they were the accurate representation of the
financial----
Senator Dorgan. Ms. Watkins, what's wrong with that
statement: ``Gee, the accountants told me it was fine, so it
was fine''?
Ms. Watkins. The concern I have is that I do agree with Mr.
Skilling that he was quite concerned about the risk inherent in
our merchant equity portfolio. If we made an investment, that
investment went up and we wrote that up. He was very concerned
that we might also have to write it down.
I worked with him on a committee in 1996 where we tried to
devise equity hedging methods for our investments. We tried
things like puts on the S&P, shorting a basket of expiration
and production companies. Nothing quite got us dollar-for-
dollar coverage.
After I left that position at the end of 1996, my
understanding is that several other people, at Mr. Skilling's
behest, tried to find a way of hedging our equity investments.
When you attempt to go to outside third parties in 1996 and
1997 and 1998, and you can't find a way of doing it, and then
miraculously you've got a dollar-for-dollar hedge from Mr.
Fastow's related-party partnership that would have been a very,
very high risk venture. I find it hard to believe that Mr.
Skilling was not aware that something was amiss, that this
could not be legitimate.
Senator Dorgan. Mr. Skilling, let me ask if you are aware
of a May 6, 2001, piece--it's called Off Wall Street--in
which----
Mr. Skilling. I'm sorry, I can't see it, Senator.
Senator Dorgan. Alright, I can send it to you. But Off Wall
Street recommended a strong sell position for Enron, a target
of $30 per share. Were you familiar with that in May of 2001?
Mr. Skilling. Who was it?
Senator Dorgan. It's called Off Wall Street Consulting
Group.
Mr. Skilling. I don't know them. May I ask a favor?
Senator Dorgan. Yes.
Mr. Skilling. May I address the comments Ms. Watkins just
made?
Senator Dorgan. Alright.
Mr. Skilling. Ms. Watkins is correct, that we would not
have been able to go outside and directly hedge the high-
technology investments. It had nothing to do with the fact that
that wasn't available. It had everything to do with the fact
that we were under hold agreements with those stocks because we
had made venture capital investments.
So we had two alternatives at that point. One was to do
what we call a low-correlation hedge, which is what Ms. Watkins
is talking about--that we used to execute in the oil and gas
business. That means you can't do a one-for-one tie. And so,
what you do is, if you own a bunch of high-technology fiber
optic companies, you short a basket of fiber optic companies.
And it's not a one-to-one correlation. In retrospect, it would
have been a fantastic correlation. It would have completely
hedged the position.
At that time, we also had people working on other
alternatives. And the other alternative was the Raptor
structure. A Raptor structure is a different kind of hedge. In
most hedges, if you go to Goldman Sachs and you buy a put on a
company, they effectively go into the marketplace and offset
that with a direct transaction that is an offset transaction to
that.
There's another way that you could write a derivative, and
that is if you put capital into a business, and they're
basically writing--in the industry, it's called a ``naked
hedge.'' A naked hedge.
So we--basically, we could either do a low-correlation
hedge, which would have worked out fine, or we could have done
this thing, which was called a ``naked hedge.'' And you take
credit risk on a naked hedge. And we just looked at the two of
those and decided--our technical people thought that that was
the better hedge to enter into.
So, did I believe this was an appropriate hedge? Yes, I
absolutely did. And if the accountants had ever, at any time,
suggested that this was inappropriate for any reason, we would
have just gone to a low-correlation hedge, as we did in the oil
and gas business. That was the standard hedging structure that
we used at that time.
Senator Dorgan. Mr. Skilling, you seem to know more about
accounting and finance than you let on when you describe these
hedge transactions.
Mr. Skilling. I know about the derivatives. I know about
the finance business, because I spent a lot of time in the
finance business. I do not--I'd like to say one other thing. We
were asking about what needs to be done. I also agree with Ms.
Watkins in her testimony in front of the House that the
accounting profession has gone through a morphing. It's gone
from a morphing of logic to something that looks more like the
tax code. And it's gotten to the point where I think someone in
anyone's position has to be a specialist to understand the
mechanics of what's going on, because there are so many rules
that have been promulgated. And that's something you might want
to think about. We ought to go back to the European structure,
where it's more what makes sense than what the specific rules
are that govern transactions.
Senator Dorgan. But, Mr. Skilling, with due respect, I'm
not going to ask you what needs to be done. I'm much more
interested in asking you what was done and was not done inside
that corporation. I'll get advice on what we ought to do in the
future from others.
But let me ask a question about compensation that relates
to your resignation and other things that were going on inside
the company. I described the Powers Report, which I think is
the best face you can put on what was going on in the company,
and it described something rotten, in my judgment. Now, during
that period of time, February 1999 to June 2001, did you
convert stock worth $66 million at that point? Did you sell $66
million in stock sales?
Mr. Skilling. What was the timeframe?
Senator Dorgan. February 1999 to June 2001.
Mr. Skilling. 2001. I don't know, but--I don't have the
records with me.
Senator Dorgan. Would that be surprising to you learn that
you did that?
Mr. Skilling. No, that would--no, that would not be
surprising.
Senator Dorgan. And do you consider $66 million a great
deal of money?
Mr. Skilling. Yes, it is, sir.
Senator Dorgan. Do you still have most of that?
Mr. Skilling. Yes, I do.
Senator Dorgan. Uh-huh. And how do you feel about that and
the employees, one of which wrote me recently--they had
$330,000 in his 401(k) account--his entire life savings--worked
many years for your company, lives in the State of North
Dakota--that $330,000 is now worth $1,700. You still have most
of your $66 million. That family has lost their life savings.
How do we reconcile this? How is it that the people at the top
got wealthy, and the people at the bottom got broke?
Mr. Skilling. Well, if--I guess a couple of answers to it.
I had a--I had a program for many, many years of selling a
modest portion of my stock. And over many years that's added up
to that number that you've talked about, Senator.
I think most employees also sold stock options and stock as
those became due, as they--you know, as they matured. So I
would guess that most people did, in fact, over the years, if
they were diversifying and prudently managing their investments
probably did sell some of their Enron stock. I feel terrible
that people that held the stock held the stock at the beginning
of this year.
I had stock and options worth $170 million, which is a
whole lot of money. And I sold $15 million under an SEC 10(b)5
plan between January and when I left the company on August 14--
$15 million out of $171 million. I think if I thought that
there was a concern, I would imagine any economic advisor would
say you probably should have sold more, diversified more.
But I think it's very tough. I mean, I don't know what to
say to the employees.
Senator Dorgan. Have you donated any of that money to the
employees' fund?
Mr. Skilling. I can't do anything at this point. I think at
this point I have 36 separate plaintiffs' lawsuits against me.
It's my expectation that I will probably spend the next five to
ten years of my life battling those lawsuits. I don't know if
I'll have anything at the end of that, and I can't transfer
anything now, because at this point that would be considered--
it's a legal issue that I'm going to have to deal with, but
it's going to be a long, drawn-out process.
Senator Dorgan. One final question. I assume you probably
regret the joke that you told in Las Vegas about the Titanic
and the State of California. You were quoted as saying: ``You
know the difference between the Titanic and the State of
California? When the Titanic went down, the lights were still
on,'' which I assume you regret saying now.
But it occurs to me that, at least from those of us who are
examining what happened at Enron--if one were to make a similar
comparison, in the Titanic, the captain went down with the
ship. In Enron, it looks to me like the captain first gave
himself and some friends a bonus, then lowered himself and the
top folks down in the lifeboat, and then hollered up and said,
``By the way, everything is going to be just fine.''
Do you now regret what you said about the Titanic and
California, given what's happened with Enron itself?
Mr. Skilling. Okay, two issues. One on regretting the joke,
and I will address that.
The second one is--I think is a pretty bad analogy,
Senator, because I wasn't on the Titanic. I got off in Ireland
because I was on vacation in Ireland, and the Titanic went on
to run into some troubles later on. I think that's a better
analogy.
As far as the joke related to the Titanic, all I can say is
that that was at a time of very, very frayed tempers as a
result of the situation that was going on in the State of
California. One week prior to that meeting in Las Vegas where I
made that statement, the highest law official in the State of
California, Attorney General Bill Lockyer said, and let me
quote: ``I would love to personally escort Ken Lay to an 8-by-
10 cell that he could share with a tattooed dude who says,
quote, `Hi, my name is Spike, honey.' ''
That was May 22, 2001. That was the kind of stuff that was
going on. Can you imagine what tempers were like? I know Mr.
Lay. I've worked with Mr. Lay for a long time. Mr. Lay doesn't
deserve a prison rape or the suggestion by the top law
enforcement official in the State of California that he be
raped in prison when he hadn't been charged with anything and
hadn't been found guilty of any issue.
Senator Dorgan. Let me inquire before we continue, is there
anyone on the panel that would require a 5-minute break at this
moment? If not, we will continue.
Senator Fitzgerald.
Mr. Hiler. Mr. Chairman----
Senator Dorgan. Pardon me?
Mr. Hiler. Can we take a 5-minute break?
Senator Dorgan. Alright, we'll stand in recess for 5
minutes.
[Recess].
Senator Dorgan. The Senator from Illinois.
Senator Fitzgerald. Thank you, Mr. Chairman.
Mr. Skilling, I was glad that you recognized the issue
about stock options and the expense for them not having to
appear on the income statement. I've actually introduced a bill
that would require companies to expense those options.
I wanted to ask you a little bit about the budgets within
Enron. Were there earnings budgets within Enron? And, if so,
who put together those budgets and who enforced those budgets
or tried to make sure the various divisions met their budget
numbers?
Mr. Skilling. The process we had, I think, was probably----
Senator Fitzgerald. Could you pull the microphone close?
Thank you.
Mr. Skilling. I think the process we had was fairly
standard. We'd do an annual budget for the upcoming year where
each of the business units would build up, you know, from what
they thought they could accomplish in the upcoming year. And
all those were consolidated, and that was approved by the Board
of Directors as the budget for the upcoming year.
And then every quarter, we had a forecast, and the forecast
was a basically a rolling forecast so that as each day passed
by and there was updates on how the markets were working and
how we were doing in the markets, the forecasts would be
adjusted so that, for example, if one of the business units was
having trouble--like in Brazil, for example--we had a lot of
troubles in Brazil--as their numbers went down, but somebody
else was doing better because of whatever----
Senator Fitzgerald. Were you ever involved in approving any
budgets for any of the divisions of Enron?
Mr. Skilling. The budgets went to the Board of Directors
for approval.
Senator Fitzgerald. Did they go to you first?
Mr. Skilling. We prepared--we, meaning Ken and I, would sit
through all the budget--each of the individual business units
would come in, and they would----
Senator Fitzgerald. Did you and Mr. Lay ever ask any of the
divisions to budget to earn more monies than they had proposed?
Mr. Skilling. Yes, sir.
Senator Fitzgerald. You did. Often? Or was that a rare
occasion that you would ask them?
Mr. Skilling. Well, I think--you know, you use business
judgment, and there were some times--there's a term in the
budgeting process that's called ``sandbagging,'' you know, and
if you had a reason to believe that a business had better
prospects, you'd say, ``I think you guys are undershooting what
you can actually accomplish.'' But it didn't mean that they
were stuck with that. During the upcoming year, then, as each
forecast was done, if it turned out that there was a problem in
the business or there was an opportunity in a business, then
those numbers would be adjusted.
Senator Fitzgerald. So you and Mr. Lay would approve the
budgets and then they would go to a Board for further approval?
Mr. Skilling. Yes, sir.
Senator Fitzgerald. And were there ever occasions when
certain units weren't meeting their budgets?
Mr. Skilling. Yes, sir.
Senator Fitzgerald. And would you ever--what would you do
if certain units weren't meeting their budgets? Would you just
say, ``That's okay,'' or would you ever ask them to--you know,
``Come on, meet your budget. You guys got to get the revenues
up, the sales up. You've got to meet your budgets for the
year.''
Mr. Skilling. Well, what we would do is--I would typically
meet, and Ken would meet, and others of top management would
meet with each of the individual strategic business units.
These are the product-market businesses in each of them. And if
one product-market group was not performing, there would be a
review, either by their boss or their boss--depending on how--
you know, what the situation was.
Senator Fitzgerald. Did you and Mr. Lay ever pressure any
unit to----
Mr. Hiler. Senator, I'm sorry. With all due respect, I
apologize for interrupting. Could he answer that? I think it's
important to go through the whole----
Senator Fitzgerald. Yeah, but he's answering more than I've
asked, and I have other questions. I'd like if he could answer
my question specifically and not waste the five minutes I have
getting off onto irrelevancies.
Mr. Skilling. I don't believe it's irrelevant, because the
purpose of these meetings that I was just describing is--
there's one of two things going on. Either the business unit
has a problem in the marketplace or a business unit has a
problem in execution. And what we were trying to do is just
separate those.
If there's a problem in the marketplace, there's nothing
you can do about it. And so you just--okay, fine. If it's an
execution problem, it might mean that they needed more people
or they needed more resources or you needed to change
management.
So what you would try to do is divine what's the basis of
the problem if there was a problem and then come up with a
remedial action to----
Senator Fitzgerald. Did you ever pressure any units to
increase their earnings to as to meet their budgets?
Mr. Skilling. I would not use that term at all. I think
what we did is--we went through--in the budgeting process, if a
business unit had a problem and they were working hard on the
problem, that was fine. And then what we did is--we'd look
elsewhere in the organization for someone whose market was
doing better than we expected, to offset that.
Senator Fitzgerald. Would compensation be affected with any
unit if they didn't meet their budget?
Mr. Skilling. We had a compensation system that did not
have a formulaic component. In other words, the specific
profitability of a business unit did not dictate what your
bonus was. In fact, if you look at the people who are in our
number one category, our best people, my recollection is that
probably half of them were in business units that were losing
money. And we'd put good people in businesses that were just
starting up or businesses that had problems. And if we didn't
pay them because they were in one of those businesses, they'd
leave, and we didn't--certainly didn't want our good people to
leave.
Senator Fitzgerald. Now, also--another area I want to ask
you about, Mr. Skilling, is valuations. There's been a lot of
testimony that the LJMs and other partnerships were set up in
order to--both to hedge certain investments in Enron's
portfolio, but also to buy certain assets from Enron. Enron
would, from time to time, sell assets to these partnerships.
Who would ensure that the valuation of the asset sold to the
partnerships was appropriate and fair, from Enron's standpoint
if you're selling an asset to a partnership?
Mr. Skilling. The process that was established left it to
Rick Causey, who was head of our accounting group, and Rick
Buy, who is head of our Risk Assessment and Control Group, to
determine the reasonableness of the transaction. The Risk
Assessment and Control Group had several hundred--I don't--
maybe 300 analysts. They would do the analysis of the assets to
determine----
Senator Fitzgerald. Was there a maximum level of authority
for those two?
Mr. Skilling. I'm sorry?
Senator Fitzgerald. For Mr. Causey and Mr. Buy. Did they
have a--could they value any sale of any asset that Enron owned
and no one else would have to review that?
Mr. Skilling. Under the terms of the LJM process, they had
to review and sign-off on those transactions. If the
transaction involved a cash outlay of a certain amount or a
sale of a certain amount, there was a hierarchy of sign-off
within the company that would be necessary. So----
Senator Fitzgerald. At what level did your sign-off kick
in?
Mr. Skilling. Oh, it changed over the time I was there. I'm
guessing probably, at the end--I don't know the exact number--
say $50 million or $60 million.
Senator Fitzgerald. So $60 million. Now, on the sale of the
Enron----
Mr. Skilling. I'm sorry. That would be for a purchase. For
a sale, I don't--I think that the authority levels were higher,
because, you know, we tended to prefer sales to purchases.
Senator Fitzgerald. And you're not sure what that was.
Mr. Skilling. I don't remember.
Senator Fitzgerald. Now, do you recall the sale of Enron's
business with Blockbuster Video--the Enron broadband video
business that they sold to the partnership called Braveheart?
Mr. Skilling. Was LJM involved in Braveheart?
Senator Fitzgerald. Pardon?
Mr. Skilling. Was LJM involved in Braveheart?
Senator Fitzgerald. No. I didn't say that it was.
Mr. Skilling. Oh, okay. I thought you said--I thought that
it was a sale to a partnership.
Senator Fitzgerald. No. No, I'm just wondering if you
recall the sale of Enron's broadband video business with
Blockbuster to the partnership known as Braveheart.
Mr. Skilling. No, I didn't know that it was sold to a
partnership named Braveheart, but I am familiar----
Senator Fitzgerald. Who did you think it was sold to?
Mr. Skilling. I just didn't recall. But I am aware of the
sale of a portion of the content business.
Senator Fitzgerald. Were you aware that it was sold to a
partnership, Braveheart, that apparently had received an
investment of $115 million from the Canadian Imperial Bank of
Commerce?
Mr. Skilling. No, sir. I would have been aware of the fact
that a sale was made and--I don't--I wouldn't typically be
involved in the details of negotiating the transaction----
Senator Fitzgerald. Enron took $110 million in earnings
over two quarters for that transaction. You wouldn't have been
aware of a transaction that would have comprised $110 million
worth of Enron earnings?
Mr. Skilling. No, I didn't say that. I was aware of the
sale of the content business--a portion of the content
business. I thought what you were asking me was--did I know
that it was being sold to a specific partnership and there's a
specific financial institution involved. That would not be a
level of detail that I would typically----
Senator Fitzgerald. Alright, you were aware it was sold,
but you didn't know it was sold to.
Mr. Skilling. I wouldn't know the specifics of the
transaction.
Senator Fitzgerald. Okay, and have you heard of the
Braveheart partnership?
Mr. Skilling. Yes.
Senator Fitzgerald. Are you----
Mr. Skilling. I have not heard of the Braveheart
partnership. I've heard of a term--I've read in the newspaper,
like everyone else--where they call it Braveheart. I did not
know it was its own stand-alone partnership.
Senator Fitzgerald. Well, I guess my time is up. Thank you.
Senator Dorgan. Senator Wyden.
Senator Wyden. Thank you.
Mr. Skilling, over the last four hours, you've essentially
made two arguments to the Committee. You said that you moved
aggressively to manage economic risk, and you said that you
relied on your people. Those are essentially the two arguments
that you've made to us.
My question to begin this round with is, given the fact
that the stock price essentially fell by half during your
watch, wouldn't that have been the point where you would stop
relying on other people and go out and independently
investigate all of these problems and try to get to the bottom
of them?
Mr. Skilling. Well, as I said, Senator, my assessment of
the reason that the stock price was going down in that time
period was three things. One was the meltdown in the broadband
business. The second one was the problems we were having with
our India project. And the third one was the situation in
California--the California energy situation.
On all three of those things, I personally got very
involved. In the broadband business, we worked to reduce the
capital expenditures in the business. We ended up redeploying a
large portion of the people from that business. On India, we
had meetings, I think, probably every week-and-a-half to two
weeks to talk about what our approach would be to the project
and how we would manage that. And in California, we spent
enormous amounts of time trying to understand what our
positions were--risk positions were in California and how we
would manage them.
Senator Wyden. What's troubling to me about that is, you're
essentially saying all of these reasons that the company
collapsed are external--they're outside the company. Yet all of
these high level people in Enron are saying there are internal
problems.
Mr. Skilling. No, sir. I----
Senator Wyden. Do you still believe there weren't any
internal problems that you should have been tackling?
Mr. Skilling. No, sir. I believe that this--when I
mentioned this run on the bank--I mean, a run on the bank just
doesn't happen. Subsequent to when I left the company, there
was a loss of confidence in the company that led to the run on
the bank. Was that related to the LJM partnerships and some of
the off-balance-sheet vehicles? I think that probably had a
significant piece to do with it, because it seemed to be what
the press was focusing----
Senator Wyden. Let's stay with your role, then. That's
helpful.
Mr. McMahon, you did bring to Mr. Skilling your concerns
about the various processes and your concerns specifically
about the shortcomings involved. Mr. Skilling has said today
that he went to Mr. Fastow, and he felt that those concerns
were addressed. What evidence did you see that Mr. Skilling, on
his watch, adequately moved to address these conflict-of-
interest issues?
Mr. McMahon. Well, there's a couple of issues. One, I know
firsthand Mr. Skilling--well, I guess not firsthand--secondhand
that Mr. Skilling did, in fact, have a conversation with Mr.
Fastow, as Mr. Fastow, as soon as that conversation was over,
called me to his office immediately to tell me that he was
concerned whether we could continue to work together anymore.
So clearly there's--a conversation was had between Mr. Skilling
and Mr. Fastow.
And even prior to that, Mr. Sutton, who was Vice Chairman
of the company, a day after I met with Mr. Skilling, called me
into a meeting and said that he had been delegated by Mr.
Skilling with the job of dealing with this conflict. So I do
know he had some conversations with people after our meeting.
Senator Wyden. Are you saying, then, to the Committee, you
are satisfied that Mr. Skilling moved to deal with these
conflicts-of-interest questions?
Mr. McMahon. I don't think I'm saying that. Frankly, within
three or four weeks after all that, I found myself in a
different job in the company, and a new treasurer was brought
on, and I just wasn't close to the situation anymore. So I
really don't know what occurred after that point in time.
Senator Wyden. Mr. Skilling, again using the Powers Report,
it contrasts pretty sharply with what you've said about the
processes for dealing with conflicts, and the processes that
were in place with respect to the company overall. The Powers
Report says that company insiders were enriched by tens of
millions of dollars at the expense of shareholders. That
doesn't sound to me like the conflict-of-interest processes and
other processes were working particularly well. Do you? You
said the processes were in place, that you trusted them.
Mr. Skilling. Yes, sir, that's what I've said. If it turns
out that one penny was taken from Enron shareholders that was
not deserved by anyone, I would be angry about that. I have no
more information about the specifics of the numbers you just
mentioned than you do. I read the same newspapers.
I think--I think it ought to be looked at. And if, for any
reason, Enron's shareholders were abused, then there ought to
be appropriate action taken.
Senator Wyden. With respect to your duties at the company,
at this point, it is not clear how you spent your time. I mean,
you have talked, for example, about how this was a new company,
this was a company with, ``light assets,'' and certainly there
are a lot of people in my home state now that wish they had
hard assets and had seen some hard profits. But, you talked
about this being a new company. You said that, in effect, you
relied on others, that there were processes in place.
Tell us what you did, in your view, to make these
substantial sums. I've gathered there are some reports that you
made $100 million as the top officer of Enron. I don't know
whether that's correct or not. But what, in your view, given
the fact that you didn't do any independent inquiry of the
conflicts of interest, that you relied on what people were
telling you, we saw working-class people get shellacked by it--
what did you exactly do to earn these very significant sums at
the company?
Mr. Skilling. Senator, I described this to the Securities
and Exchange Commission. Let me see if I can do it quickly,
because I know you're in a rush on this. But I would say, by
the time I became CEO, probably 40 percent of my time was
involved in strategic business decisionmaking. I tried to meet
with each of our strategic business units, each of our
businesses.
And I think at that time, if you look at--we had five
segments, there were multiple businesses within each of those
segments--we probably had 40 to 50 businesses that were
operating inside the company. I would try to meet with those
businesses on a frequent basis to understand what was going on,
which markets they were going after, what problems they had,
what resources they needed to be successful, and so forth. And
that involved enormous travel. I was probably out of town 50
percent of the time visiting businesses. We had operations in
Europe. We had operations in Asia, operations in South America.
That was 40 percent of the time.
Thirty percent of the time was various policy issues. Our
trading controls policy, for example, was a very complex, very
time-consuming process where we were managing the positions and
exposures that could be taken by various groups within the
company, and that had to be reviewed on a daily basis to
understand what the issues were so that we could manage that.
Also, with those policy issues, personnel--I would imagine
of that 30 percent on policy, 20 percent of the time was spent
in discussions with our key people or trying to attract new
talent to the company or redeploying people from one
organizational unit to another to help keep the businesses
growing. So that was about 70 percent of the time. And I'll
tell you, that was a lot of hard work.
The third component, probably 30 percent of the time are
what I would call special issues that were kind of timely
issues that needed to be dealt with. And when I became Chief
Operating Officer, that was primarily JBLOC, which was a large
contract we had some serious problems with in the United
Kingdom that needed to be negotiated in 1998 and 1999, reducing
the amount of capital we were spending in the international
markets because we were not earning compensatory rate of return
on that business. 1999 and 2000, it was the startup of our
broadband business and trying to get that up and running and a
number of new businesses. In fact, Jeff ran our new industrial
products business where we were starting to take the same
business model--we had natural gas and electricity--and move it
to some new--some other businesses.
And then in the year 2001, dealing with California, dealing
with the broadband business that we had an issue with, and
trying to sell and monetize international assets so we could
bring more liquidity to the company.
Senator Wyden. Well, those all look like useful strategic
kinds of matters, but it sure looks to me like they're nowhere
near as important as having in place a strategy for dealing
with these conflicts of interest that look like they were just
oozing all over the place. And----
Mr. Skilling. Sir, we--I mean, we did. We had a control
system in place that we believed--the Board and we believed
would manage it. And you, again, go back to the minutes, and
you'll see that we spent a lot of time talking about it. We
were aware of it. We spent a lot of effort to manage that
conflict. We did spend time on it.
Senator Wyden. I want to ask one other question. You'll
obviously have to convince a lot of courts and a lot of
governmental agencies, but it certainly runs contrary to those
people who were inside the company, who ticked off warning
after warning. I outlined that four hours ago, and that's why
it is so hard and so implausible to believe what we're hearing
today.
One question for you, Ms. Watkins. I wrote a law a number
of years ago that requires accountants to look for fraud and to
have in place rules to bring it to the attention of government
regulators. Now, you had some dealings with accountants all
through the process, and you thought, by your words, that Enron
was going to implode in accounting scandals.
I'm not going to ask you to comment on the law and be a
lawyer, but does it sound to you like the company was complying
in a, sort of, conceptual way with a set of rules and laws that
say you've got to look for fraud and bring them to the
attention of management and, if not corrected, to the
regulators?
Ms. Watkins. Well, what concerns me about some of the
things that have come to light since this past fall, mainly
from the documents from the various congressional inquiries
into Enron, is that Enron itself had as one of its main risks
associated with the Raptor deals is accounting scrutiny.
Additionally, we have discovered that Arthur Andersen had a
memo to the files dated February 2001 where they were concerned
about the propriety of this. I do not understand why Andersen
did not go to Enron's Audit Committee with their concerns. I am
concerned any time that accounting scrutiny is at the top of
the list of a risk associated with a structure.
Senator Wyden. Well, what is important about that is there
is a Federal law on the books, it was on the books all through
that, that requires that when Arthur Andersen has any reason to
believe that there is questionable activity, potentially
fraudulent activity, that they do just what you were talking
about. I appreciate your confirming certainly my opinion at
this point that they should have done it and it was not done.
Thank you, Mr. Chairman.
Senator Dorgan. Senator Boxer.
Senator Boxer. Thank you.
Mr. Skilling, you worked very hard at Enron; and given your
own testimony, night and day. One of the reasons you left, you
were working too hard. We understand what that is to not have
enough time for family, et cetera. You're also very smart. And
that's why I do not believe you when you say you did not know
what was going on, because you had people with lesser
education; you had people with less access to the documents,
less access to the meetings, to the people making the
decisions, who knew exactly what was happening.
I showed you a videotape where you and Ms. Olson tell
employees in December 1999 to put all their 401(k) plan monies
into Enron. She turned to you after she said absolutely do it,
you smiled and nodded very, very clearly. At that time, you had
sold over 500,000 shares of stock for $21,928,000.
When I said that, you questioned me. We got the actual SEC
filings with your signatures on them. I would like to put those
in the record if I might, the SEC filings. That was a third,
Mr. Skilling, a third of the stock you would eventually sell.
So it was not just a little bit of the stock. At the time when
you were telling your hard working employees, for whom you
profess to feel much grief and sorrow right now, to put all
their 401(k) monies into Enron, you had already sold a third of
the stock you would eventually sell.
And I want to point out that Ms. Olson, Mr. Chairman, Ms.
Olson, who led the cheering rally there for Enron stock, two
months after she told people to put their money in Enron stock
she started to sell off her stock as well. I ask unanimous
consent to put that filing into the record.
Senator Dorgan. Without objection.
Senator Boxer. Mr. Chairman, as a Member of the Consumer
Affairs Subcommittee of the Commerce Committee, I care about
the little guy. And I will tell you if you look at this, it is
asymmetry here. The people who put their money into the 401(k)
plans lost about a billion, the insiders gained about a
billion. That is asymmetry. That is an unfair share of pain,
suffering, and loss of dreams, and that is why I think it is so
important that we hold this hearing. Let us not forget why we
are here.
Now I just want to follow up on my Chairman's comments on
the Off Wall Street Consulting Group. Mr. Skilling, do you know
this group? Have you ever heard of them?
Mr. Skilling. I do not.
Senator Boxer. You've never heard of them?
Mr. Skilling. I do not think so. I do not recall.
Senator Boxer. You do not recall. Did anyone in your
company talk to you about what they said? This was May 2001,
before you left the company in August 2001. They put out a
scathing evaluation of the company which I'll read a little
synopsis of.
Mr. Skilling. I may have seen it, I do not recall.
Senator Boxer. You may have seen it?
Mr. Skilling. Yeah.
Senator Dorgan. If you'll refrain, let me ask that a copy
of that be delivered, because I did ask a question about it, as
well. And let us just ask that a copy be delivered.
Senator Boxer. There is a really important reason why I'm
talking to you about this. Maybe your lawyer has that.
Mr. Skilling. I'm sorry? Oh.
Senator Boxer. I'm asking you about this because you left
the company in August. You said it was in great shape. You kept
on selling your stocks before that time. You had really
unloaded everything you were going to by that date. And here
comes this analysis, and if I could show you page 4 at the
top--we'll start at page 3 at the very bottom, because you keep
saying it is complex, what happened. Well, this is a clear
explanation of what happened.
Mr. Skilling. I've got no page 4.
Mr. Hiler. Excuse me. We do not----
Senator Boxer. I'm sorry. It says ``Because margins''--it's
actually----
Mr. Skilling. I've got page 1, 2, 6.
Senator Boxer. Oh, he is missing page 3. Well, it is okay.
I'm only reading one sentence on page 3 and then we'll get to
page 4.
Mr. Skilling. I'd like to see that if that is possible.
Mr. Hiler. We do not have page 4.
Senator Boxer. He needs page 3 and 4.
Mr. Skilling. I've just got pages----
Mr. Hiler. We have 1, 2, 6----
Mr. Skilling. I'm missing 3, 4 and 5.
Senator Boxer. Sorry about that.
Mr. Hiler. That is okay.
Senator Boxer. We apologize.
Mr. Hiler. While we're waiting for that, ma'am----
Senator Boxer. No, it is right here. I just do not want to
lose my track.
Mr. Hiler. Okay. Sorry.
Senator Boxer. Page 3. This is the analyst writing:
``Because margins on Enron's incremental business are so thin,
and because it now takes''--follow this--``about $2.1 billion
in additional revenues----''
Mr. Skilling. I'm sorry, I'm----
Senator Boxer [continuing]. ``Just to generate----
Mr. Skilling. We were having a little altercation over
here.
Senator Boxer. All right. I'll start again.
Mr. Skilling. Start over again.
Senator Boxer. Page 2 bottom.
Mr. Skilling. Yeah.
Senator Boxer. ``Because''--this is the analyst from this--
I understand that it is a very well respected group. ``Because
margins on Enron's incremental business are so thin, and
because it now takes about $2.1 billion in additional
revenues.''
Mr. Skilling. I'm not catching it. On page--bottom of page
2?
Senator Boxer. It is the bottom of page 3----
Mr. Skilling. Page 3, Okay.
Senator Boxer [continuing]. The last----
Mr. Skilling. All right. Okay, gotcha.
Senator Boxer. I'm going to just start again. I hope I can
add on a couple of minutes here.
Mr. Skilling. Okay.
Senator Boxer. ``Because margins on Enron's incremental
business are so thin, and because it now takes about $2.1
billion in additional revenues just to generate an additional
penny of after-tax earnings, it probably should come as no
surprise that Enron management appears to have resorted to a
variety of transactions that are of questionable quality and
sustainability to manage and to boost its earnings. These
transactions appear to be purposely obscured in Enron's public
reporting.''
I would ask unanimous consent that the summary of the
report be placed in the record.
[The information provided follows:]
Summary
Enron's business model has been evolving toward trading and risk
management services mainly for the energy market. Enron has been
abandoning its energy producing physical assets in favor of trading
assets.
Recently, Enron has had the best of both worlds. Booming energy
markets have maximized the value of its remaining physical assets,
while high prices and increased volatility have created trading
opportunities that have allowed the company to increase revenue very
substantially. After growing revenue by about $l0B year over year in
both 1998 and 1999, revenue growth exploded in 2000, as revenue rose to
$100B from $40B in 1999.
When revenue increased by $11B in 1998 versus 1997, gross profit
increased by $2B. When revenue increased by $9B in 1999 versus 1998,
gross profit increased by $0.5B. However, when revenue increased by
$60B in 2000 versus 1999, gross profit rose by only another $0.5B.
Gross margin as a percent of sales dropped from 13.3 percent in
1999 to 6.2 percent in 2000. However, the incremental gross margin
dollars generated by the incremental sales year over year was just 1.52
percent of the incremental sales. Gross margins have not been released
for Q1 01, but operating profit rose by just $429M, only 1 percent of
the year over year sales increase of $37B.
Enron's Wholesale segment accounted for 95 percent of Enron's $l00B
of revenue and 71 percent of its IBITDA in 2000, versus 90 percent of
revenue and 55 percent of IBITDA in 1999. In Q1 01, Wholesale was 97
percent of revenue and 95 percent of total IBIT. ENE total IBIT was
just 1.6 percent of total revenue in Q1 01 versus 4.7 percent in Q1 00.
Wholesale, and trading in particular, has clearly become the Enron
story. The Wholesale division combines the results of Enron's trading
and risk management business with results of various physical assets
that the company own or controls. Enron does not break out gross margin
or operating profit by these two types of Wholesale operations.
EnronOnline, the company's on line trading division, was clearly a
principal driver of revenue growth in 2000.
``Street'' analysts expect ENE to generate about $54M of
incremental net income for the balance of the year 2001 versus the last
nine months of 2000. However, the ``street'' also estimates only $20B
of incremental revenue for the balance of 2001 versus 2000. In our
opinion, ``Street'' analysts may not have grasped ENE's business model.
By our estimate, ENE would have to increase revenue by $45B over the
comparable period in 2000 to make consensus estimates. This would be
$7B higher our current estimated increase of $38B.
For 2002, ``street'' analysts expect ENE to generate incremental
net income of about $475M versus 2001. This is based on total revenue
estimates of just $l26B, which is only a $12B increase over current
2001 estimates of $112B. The ``street's'' 2002 projection is $60B under
our revenue projections for 2002, but consensus EPS estimates are much
higher than ours. We estimate that ENE would have to increase revenue
by about $90B (based on 2001 analyst expectations for revenue of $112B)
to meet their EPS estimates. We expect Enron will miss this $215B of
needed revenue by approximately $30B in 2002.
Actually, there arc few ``street'' revenue estimates for Enron.
``Street'' analysts prefer to estimate operating profit, although it is
not clear how they obtain their results. The revenue estimates that do
exist appear to be far too low, as we have shown. Analysts have not
understood to what extent trading would become the main driver of
Enron's business. This may also lead them to miss evaluate the company.
If analysts understood that increased volume of trading was driving
much of the bottom line increase, they would need to think about the
huge revenue increases needed to meet their earnings targets. They
would begin to realize, as we have shown, that increased trading
appears to result in lower margins. It has diminishing returns.
Investors would then also see bow slim margins have become and they
would understand that if trading increases still more, which it will
have to do to increase profit, profit margins should become slimmer
still. Such low margins have important implications for the company's
balance sheet, its return on assets and invested capital and,
importantly, on its risk profile. We think an understanding of Enron's
business model would lead investors to award a much lower multiple to
Enron's forecasted EPS.
Industry sources say that Enron traders make large directional
bets, and that they think that Enron is especially long gas and power.
Enron's portfolio of long and short positions is ``globally'' balanced,
that is to say that individual positions may not be specifically offset
with an opposite position. These sources say that this is the main
source of the risk, and that counterparty risk is not a major issue in
general (though the PG&E receivable may be a problem, as we discuss).
We note that a $21B long position and a $20B short position in the
Wholesale division sits on top of total company equity of just $11B.
Total assets are $65B. Hedge fund managers know that it is possible to
lose money on both long and short positions at the same time. Enron's
Wholesale portfolio is about 200 percent long and 200 percent short and
leverage is increasing. According to energy traders, some of these
positions could experience swings of 25 percent of their value.
Notional single position sizes can be in the hundreds of million of
dollars.
Very high revenue increases are largely generated by increased
opportunities that result from high prices and by very high volatility
in energy markets. Although the risk of less volatility, with the
result that ENE would experience a significant decrease in its
earnings, may now seem remote, the peak in volatility may occur this
summer. We doubt that volatility can increase after this summer, even
in the West. Industry observers predict high volatility to remain for a
couple of years in the West, until more supply comes on line. However,
they expect volatility in other parts of the country to decrease. Even
this summer's widely anticipated New York energy crisis may not live up
to expectations. It depends on the weather. But even if New York's
energy market is volatile this summer, it should be temporary. Over
all, except in the West, volatility will probably decline, though New
York may remain tight. Declining volatility is a major risk for Enron,
as it reduces the opportunity for trading profits. We will discuss
volatility and prices in detail.
There is also risk in doing longer duration deals to make up for
lower trading profit. Longer deals are more profitable because the
total value of the discounted cash flows is higher. However, as the
duration gets longer the risk also increases. The future cash flows
become less predictable. As money managers know, a 30 year bond is more
volatile than a two year bond. The changes in the value of the
securities held by Enron pose a risk to future earnings.
Because margins on Enron's incremental business are so thin, and
because it now takes about $2.1B in additional revenues just to
generate an additional penny of after tax earnings, it probably should
come as no surprise that Enron management appears to have resorted to a
variety of transactions that are of questionable quality and
sustainability to manage and to boost its earnings. These transactions
appear to be purposely obscured in Enron's public reporting. They
include related party transactions whose total earnings impact is
difficult to gauge, and they include gain on sale items that are of
questionable quality and where the buyer appears to have recourse. In
the past, when Enron management has been questioned about some of these
transactions, it has not been forthcoming.
By our estimate, about $0.41, or 28 percent, of EPS in 2000 came
from gains on sale of securitized assets, some or all of which may have
recourse to Enron, and related party transactions. Gains on sale of
securitized assets accounted for about $0.33, or 22 percent of 2000
EPS, by our estimate. About $0.08 of the $0.33 appears to be due to an
unusual related party, called Whitewing, which we discuss below. Other
related party transactions accounted for another $0.08 of the $0.41, or
5 percent of EPS in 2000. The fact that many of the gains on sales
transactions also appear to have recourse to Enron casts their quality
into doubt. Enron's balance sheet reflects swaps that insure the buyer
of these securitizations against some amount of loss. We go into detail
on these transactions below.
Finally, we come to the issue of ENE's valuation. Some estimates of
Enron's value seem simply arbitrary, while some others attempt to use a
``market driven'' price to earnings multiple based on future earnings
by segment. First, we can not agree with ``street'' analyst EPS growth
projections because we expect lower prices and lower volatility.
However, even if Enron were to generate the massive revenue increases
required to hit EPS expectations, given the added risk from the balance
sheet and from decreased volatility, the very high so-called ``market
multiples'' that are being awarded to the business are inappropriate.
For example, one analyst estimates that the Wholesale group will
produce about 82 percent of total year 2001 IBIT. He then extrapolates
that Wholesale will earn $1.48 of his $1.80 2001 estimate. The analyst
applies an arbitrary 35x multiple to those earnings, though even by his
aggressive estimate they will grow at 20 percent per year in 2002. He
thus values Wholesale at $52 per share in 2001, which is still only 58
percent of his total valuation of $90. He then adds Broadband, which is
even more arbitrarily valued at $30 in 2001 and $34 in 2002, even
though it loses money. This so-called analysis is typical of current
``Street'' thinking.
Goldman Sachs, by contrast, sells for just 16x 2001 estimated EPS,
16x 2002 EPS, and 7.65x EBITDA. Few would argue that Enron has a
business franchise equal to Goldman. However, using Goldman as a yard
stick, as we explain below, we estimate that ENE might be worth between
7.65x TTM EBTDA, or about 15x EPS. That would put Enron's total value
between $23 and $30 per share. We also do a separate segment analysis
below. By this method, we estimate that the Wholesale division might be
worth $19.50 per share. Retail, pipeline, and Portland General may be
worth $9. We value Broadband at about $1.75. We deduct $3 for the cost
to operate these businesses at the corporate level. We arrive at a
value of $27 per share by this method.
Senator Boxer. Now this is not complicated to read this,
and this is a respected company. Do you recall ever having seen
this, seen excerpts of it, heard it discussed in any way by
your colleagues or others?
Mr. Skilling. Senator, I do not recall specifically. I do
not know if they are respected analysts. I do not know, I'll
take your word for it that they knew what they were doing,
but--which may end up being a mistake, but this is just
absolute, absolutely, fundamentally incorrect.
Senator Boxer. What is incorrect?
Mr. Skilling. The concept of declining margins. It is
fundamentally incorrect.
Senator Boxer. So this analyst who predicted the demise of
Enron was incorrect?
Mr. Skilling. No, this analyst said--and because--and this
has been something--and I do not know this specific firm, but
there are a number of firms that began to comment on a drop of
margins in the company. And the reason that they got that is
when energy prices quadrupled, natural gas and electricity
prices quadrupled. We do not own generating facilities, or own
very few. We do not own oil or gas production.
Senator Boxer. Sir. Mr. Skilling, I appreciate that you do
not agree with this. I'm not asking you that.
Mr. Skilling. No, no, wait. Our margins----
Senator Boxer. You--no, no, no, sir. I have a reason----
Mr. Skilling. I want--Senator, you have----
Senator Boxer. My question----
Mr. Skilling [continuing]. Asked me a very----
Senator Boxer [continuing]. Had nothing to do with whether
you agree.
Mr. Hiler. Senator, I'm sorry. With all due respect----
Senator Boxer. I simply asked if you recalled it.
Mr. Hiler. He is trying to answer your question.
Mr. Skilling. I'm trying to answer.
Senator Boxer. No, no, that was not my question. My
question simply was----
Mr. Skilling. The question is this is absolutely in error.
I think----
Senator Boxer. But I did not ask you----
Mr. Skilling [continuing]. The intent is to suggest that I
have some information from reading this that impacted my
decision----
Senator Boxer. No, that was not----
Mr. Skilling [continuing]. To sell stock.
Senator Boxer [continuing]. What I asked.
Mr. Hiler. Senator, my--Senator, with all due respect, my--
--
Senator Boxer. Mr. Chairman, I've asked a simple question.
Senator Dorgan. Let us let Senator Boxer ask the question--
--
Senator Boxer. Let me ask it again. I never asked what you
thought of this. I asked if you had seen it, discussed it,
heard it discussed with your colleagues. That is all I want to
know, not whether you----
Mr. Skilling. No, I do not recall specifically seeing this
document. I have seen documents and analyst comments that
similarly raised an issue of declining margins which I
fundamentally disagree with.
Senator Boxer. I respect that. Okay. Now are you aware that
the person who wrote this was demoted?
Mr. Skilling. Demoted?
Senator Boxer. Yes, demoted in his company.
[Mr. Skilling shakes head].
Senator Boxer. Okay. Mr. Chairman, my time is up. Can I
stay for another round?
Senator Dorgan. Of course.
Senator Boxer. Thank you.
Senator Dorgan. Senator Nelson.
Senator Nelson. Thank you, Mr. Chairman.
Ms. Watkins, I have a series of questions that I'd like to
get for the record, so if I could address you.
Ms. Watkins. Okay.
Senator Nelson. Could you specifically describe the
difference between the so-called off-the-books partnership and
other Enron partnerships that may have been publicly traded, of
which we're told that they number several thousand?
Ms. Watkins. Are you referring to the special purpose
entities that Enron routinely uses to fund certain assets?
Senator Nelson. I'm talking about a number of partnerships.
In some cases the on-the-books ones were the ones that were
traded on stock exchanges. And I wanted you to describe the
difference between the off-the-books and the on-the-books
partnerships, of which we've been told there were about 3,000.
Ms. Watkins. Well, there are--we had equity investments.
Typically those were in public or private companies, not always
partnerships, but those were in our merchant portfolio that we
would fair value, or write up to their fair market value.
As to the numbers in the press, about 3,000, you know,
special purpose entities, I'm not specifically aware. All I can
speak to is different transactions that I might have worked on.
We might set up as much as three or four for an international
investment. And, as I mentioned before, it was to give us all
kinds of alternatives if and when we ever wanted to sell that
investment that we had a company that a buyer would be--would
find attractive, you know, whether they wanted to buy a Cayman
company or a U.S. company. So a lot of that was just--we did
hire the best and the brightest, and it was strategically
planning how we bought assets.
Senator Nelson. Okay. There may be some semantics here, but
I'm particularly thinking about partnerships that were created
whereby they would be publicly traded on a stock exchange.
You're familiar with those kind of partnerships?
Ms. Watkins. No, sir, I'm not. That Enron held? No, not
that were publicly traded.
Senator Nelson. Well, let me ask you about in a partnership
that was publicly traded, was there an opportunity whereby
Enron would allow partners to buy additional interest in that
partnership as a way of supporting the partnership's ability to
distribute the minimum quarterly dividends to its investors or
limited partners?
Ms. Watkins. I think you might be referring to some of the
master limited partnerships that Enron had, I think, in the
liquid pipeline area and possibly EOTTs, but I do not have any
firsthand knowledge of the way those partnerships worked.
Senator Nelson. Mr. Skilling, do you?
Mr. Skilling. I'm really not familiar with the mechanics on
the master limited partnerships.
Senator Nelson. You're not familiar with whether or not the
partnerships would allow limited partners or others to buy in
instead of buying publicly-traded shares of those limited
partnerships?
Mr. Skilling. Senator, I just do not know what that means.
Can you say it again?
Senator Nelson. All right.
Mr. McMahon.
Mr. McMahon. And I'm afraid I'm going to have to be a
little bewildered, as well. The publicly traded partnerships
that I'm aware of that Enron somehow associated with are EOTT,
which is the master limited partnership, and Northern Border
Pipeline. There may be others, but I do not--none come to mind.
In the EOTT partnership, if I think I understand your question,
there is some sort of obligation in which Enron as the general
partner has an obligation to EOTT limited partners for dividend
distributions. I'm not precisely sure how all that works or how
that obligation manifests itself.
Senator Nelson. So I'm really seeking information here. In
a publicly traded partnership then that Enron could allow
private parties to buy into that partnership instead of through
purchasing on the public traded stock market. And if so, it was
a way to support the partnership's ability to distribute the
minimum quarterly dividends in that partnership?
Mr. McMahon. I'm not familiar with the first point, which
if I'm understanding your question, that somehow off-exchange
purchases and sales can happen. I'm not familiar with that
capability. But on EOTT in particular, there is some sort of
credit support that Enron gave EOTT which would assist it, as I
understand it, to make its quarterly distribution from time to
time.
The reason I know this is it occurred post bankruptcy when
EOTT tried to ask Enron to make good on that promise, and
obviously post bankruptcy we were not able to. I'm afraid that
is really all I know about that.
Senator Nelson. Well, as we get on into this in further
discussions, I'm given to believe that there were certain
partnerships set up that could meet their cash requirements by
issuing additional limited partner interest with the
partnership. And that Enron would contribute to that
partnership in exchange for additional partnership interest to
support the partnership's distribution of the minimum quarterly
distribution. And if that is the case, and that is what I'm
asking, there is absolutely no risk to someone investing in
that partnership, because then Enron will come in and support
it so that the partnership distribution is there, the minimum
quarterly distribution is there.
So none of the three of you, save for your general
knowledge, are aware of this particular mechanism?
Ms. Watkins. No, sir, I am not.
Senator Nelson. Okay. Let me ask you this, Mr. Skilling.
Earlier we had talked about--well, let me ask you. Enron Energy
Services--that was a partnership. And was it consolidated on
Enron's books?
Mr. Skilling. Yes, sir.
Senator Nelson. Okay. Now earlier I had asked you if you
had any information about any information or communication
being transmitted from Enron, its officers, its directors,
encouraging pension funds to acquire Enron stock, and you had
indicted that no, you did not have any information of that.
Mr. Skilling. Well, I--no. I thought the question you were
asking was, you know, sometimes when the stock was dropping. I
think you were saying that they were buying stock in October or
something, was there any communication. I was gone, so I would
not know.
There would--in the normal course of business we had an
investor relations group. And I would imagine, you know, over
the last decade I'm sure that they probably have talked with
most of the large pension funds in the country and talked to
them about Enron as a potential investment candidate. But I,
after I left on October 14, I would have no information about
that. August--I'm sorry, August 14 of 2001. I would have no
information.
Senator Nelson. All right. But before that you would have
some knowledge of those pension funds investing in Enron stock?
Mr. Skilling. Well, not really. I mean there--we used to
get a printout, I do not know, once a quarter or once a half,
that just showed who the largest shareholders were in the
company. I do not--it would be the list of like the top 25
holders. And then I would typically see that, but to be in the
top 25 you had to own a lot of stock. I mean the top 25 holders
of Enron stock would--I forget what the threshold is, but it
was probably 10 million shares, 5 or 10 million shares.
Senator Nelson. Do you have any recollection back in 1998
that you talked to the Ontario Teachers' Pension Fund of
getting them to invest in EES?
Mr. Skilling. I'm sorry, say again.
Senator Nelson. The Ontario Teachers' Pension Plan.
Mr. Skilling. Yes, sir.
Senator Nelson. Getting them to invest.
Mr. Skilling. In--but I did not hear----
Senator Nelson. In EES, Enron Energy Services.
Mr. Skilling. But what was the date, sir?
Senator Nelson. 1998.
Mr. Skilling. I do not remember the specific meeting, but
the Ontario Teachers' Pension Fund became--bought a portion of
Enron Energy Services. And I believe CalPERS bought a portion
of Enron Energy Services in late 19--would have said it was
1997, but was it 1998?
Senator Nelson. January of 1998.
Mr. Skilling. January of 1998, okay. All I can say is that
I do not recall specifics, specifically talking to them, but
they were our partner in EES. We sold, I think, 7 percent of
the company, and I think Ontario Teachers took, this is my
recollection, like 3 percent. I think CalPERS took 4 percent of
the business.
Senator Nelson. And what was your role in getting the
Ontario Teachers' Pension Plan to invest?
Mr. Skilling. I do not recall specifically. I would imagine
that for an investment like that they would have sent their
representatives to Houston and asked what the business strategy
was of the business. And I do not know if I gave that
presentation or if somebody else did, but we would typically
give a presentation on what the markets were that we were going
after and how we were going after those markets, and that sort
of thing.
Senator Nelson. Okay.
Thank you, Mr. Chairman.
Senator Dorgan. Senator Hutchison.
Senator Hutchison. Thank you, Mr. Chairman.
Mr. McMahon, I am a lawyer, but I'm not a bankruptcy
lawyer. But after my last line of questioning a bankruptcy
lawyer did call my office and suggested that there are ways
that a company in bankruptcy can help severed employees. And
that is by either hiring former employees back for a temporary
period or listing some of the severance costs as administrative
expenses.
My question to you is would you talk to your bankruptcy
lawyers to see if you can do anything for the severed employees
who have lost so much? This would not affect their pensions,
but many of them would feel so much better if they at least had
their contractual severance obligations met. Would you make
that commitment today?
Mr. McMahon. Absolutely, Senator. You have my personal
commitment. This is a very high priority for existing
management of the company to deal with this. And I'm not an
attorney, but I'm becoming a bankruptcy expert unfortunately,
and a lot of these things we have pursued.
The administrative claim as an issue for pre-petition
severed employees, as I understand that, that is a matter of
getting that paperwork done. Post-petition employees it is a
little, as I understand, it is a little bit tougher matter
because of the termination of the severance plan. But we are
actively researching everything we can do for these employees
and we're going to be working with the Creditors' Committee on
this, as well.
Senator Hutchison. I appreciate thus far your commitment to
do that. I think it is important. You have a certain amount of
assets left, and I would like to see a more favored treatment
of people who have been left in the lurch.
Second, if this bankruptcy lawyer is correct and people can
be temporarily rehired and then made to be administrative
expenses later, I would at least like to see the employee's
status the same as attorney's fees, for instance. And I think
that would be some small amount of help that might be given in
these circumstances.
I would like also to ask you, Mr. McMahon, if the nature of
the business that is left of Enron, in that are there any other
off balance sheet partnerships and is that an ongoing concern
that we should address?
Mr. McMahon. What is left of Enron we are having
internally, in connection also with our external counsel,
Skadden, Arps & Weil, Gotshal, exhaustive investigation of all
the corporate structures that the company has. Most of these
partnerships or finance structures have creditors. So, as part
of the bankruptcy, we are determining who they are, how it was
structured, et cetera. And it is my understanding that we are
fairly far along in that process, and to date have not
discovered anything that would cause us concern, a lot of these
other partnerships, but that is a process that is still under
investigation right now.
Senator Hutchison. Okay. Thank you, Mr. Chairman.
Senator Dorgan. Senator Hutchison, thank you.
Mr. Skilling, on January 22, 2001, the Enron Board of
Directors awarded you an additional 125,000 shares of stock
roughly, at no cost to you. Is that accurate?
Mr. Skilling. Shares of stock or stock options?
Senator Dorgan. Stock options, I'm sorry. Options for
shares of stock.
Mr. Skilling. I do not remember the exact number.
Senator Dorgan. The 125,562 shares, or options rather for
Enron stock, why would a Board do that in a January meeting?
Mr. Skilling. Well, January was typically our compensation
meeting. What we would do is calculate how the business had
done for the prior year, and then based on that we would
determine what our overall bonus pool was and allocate that to
our employees. So that occurred simultaneous with management.
Senator Dorgan. Now, when you were testifying before the
House of Representatives, you were asked if you dumped stock
because you knew there was some financial trouble in the
company. And, I just pointed out that you sold $66 million
worth of stock in a period of time. You said, ``No. In fact,
when I left Enron holding almost the same number of shares that
I held at the beginning of 2001.'' But, you did not tell the
House of Representatives that, in fact, during that period you
received 125,000 shares, options for shares of Enron. Is that
true?
Mr. Skilling. The shares count that I gave is shares, not
options. So those options----
Senator Dorgan. Yeah, but you were busy selling. You sold
500,000 shares for $15 million a month after you left Enron;
you, from January 3 to June 13, sold 10,000 shares every
Wednesday for a total of 240,000 shares. The point you were
making to the House was, ``Look, I did not dump anything. In
fact, I ended up with about the same amount as I started
with.''
But, in fact, when you take a look at what was sold, you
converted options to shares and sold them. It appears to me you
did not tell the whole truth to the House when you answered
that question.
Mr. Skilling. Well, this is--I think that gets to Senator
Boxer's question. I do not know how you want it presented. I
mean the statistics are there; you have to file them with the
SEC. You guys can get them and present them however you want.
Mr. Hiler. I would also just--I would like to point out for
the record, I believe that was in my client's opening
statement. And what he was showing, I believe, was that he did
hold shares----
Mr. Skilling. At the end.
Mr. Hiler [continuing]. Significant shares at the end, at
the period when he left the company, and he had significant
shares at the beginning of the period.
Mr. Skilling. I'll give you an example, Senator.
Senator Boxer said that I sold 500,000 shares. There was a
little confusion there because there was a stock split that
occurred in 1999. So her number was calculated different, you
might have to adjust for that. But I started the year 1999 with
262,000 shares that I owned. I ended the year 1999 with 906,000
shares. So I actually had an increase of over 600,000 shares
during that time period. Yes, some shares were sold during the
period, but in terms of share ownership, the share ownership
increased. So I do not, you know, you can present it a number
of different ways. I do not know--I mean I've presented it
every way I can and you guys have the statistics and you can--
--
Senator Dorgan. Well, and I think I represented what we
have, and it suggested something different than you're now
saying, but let me ask about another report. I do not have any
basis for knowing about this, I just ask you to respond to it.
There was a report in the Dow Jones news wires that you and Ken
Lay stage-managed a fake trading room to impress analysts,
jokingly referring to it as ``The Sting.'' You wanted the room
to look like a Wall Street trading floor, so you got the best
equipment, tore down offices. You would tell the analysts
``This is how we structure a deal.''
``And we painted phones black to make it look like a slick
operation. We held a rehearsal with Skilling and Lay the day
before, and Skilling said he wanted to play the Paul Newman
character in the movie `The Sting' when the analysts came
through. But they said it really was more of an elaborate
charade because there was not much going on there.''
How accurate is this?
Mr. Skilling. Any suggestion that the trading floor in EES
that was developed was not for specific business purposes and
did not significantly advance the conduct of the business is
preposterous. It is absolutely preposterous.
Senator Dorgan. Did you try to deceive analysts when they
came to that floor?
Mr. Skilling. Absolutely not.
Senator Dorgan. Did you paint phones black and invite other
people to come sit at those desks----
Mr. Skilling. I do not know how you paint phones black.
We--I mean we have standard telephones in the company. I'd
imagine they're the same phones that we have everywhere else.
If someone painted a phone black, I certainly did not know
about it. Was the trading floor a legitimate effort to put
together a better risk management and better business process?
Absolutely.
Senator Dorgan. I understand that, but I was asking about a
circumstance they alleged you created in order for analysts to
be able to see something that did not actually exist in
operation, but I think you've answered that.
Let me ask you something on a chart that I had used
previously. This chart shows subsidiaries of major
corporations. And it may be hard for you to see, but I'll
describe what it is. It talks about the rank in Fortune 500,
the first 10 companies, 10 largest companies, and over on the
far right it says ``Subsidiaries and Offshore Tax Havens,
Enron, 872.''
The next largest company is General Motors. They had 14
subsidiaries and offshore tax havens; Enron, 872.
The reason I ask the question is, you know, some people
think that this was a culture in which you stretched the rules,
bent the rules, then broke the rules; and that part and parcel
of all of this is to be as aggressive as is possible to do a
lot of things, including avoiding paying taxes. How is it that
the company would have 872 subsidiaries and offshore tax
havens? Any response to that?
Mr. Skilling. Senator, I do not know. If you look at the
total subsidiaries the company had, I'm guessing 3,000
subsidiaries.
Senator Dorgan. You had 2,832, far more than any other. The
biggest company, General Motors, had 316. But of interest to me
is how many of them were in tax havens, Cayman Islands and so
forth. I do not think I've ever seen anything quite like this,
and it reinforced for me, at least, that there was a culture
here of----
Mr. Skilling. Yeah, but--I'm sorry, I cannot see----
Senator Dorgan [continuing]. A lot of unusual----
Mr. Skilling [continuing]. The chart from here. My eyes are
not as good as they used to be. Do you have any----
Senator Dorgan. Let me ask someone to come down there and
show it to you.
Mr. Skilling. Do you have any banks on the list? Do you
have General Electric on the list?
Senator Dorgan. Those are the 10 largest corporations in
the country.
Mr. Skilling. Then why is not General Electric on the list?
Senator Dorgan. Well----
Mr. Skilling. Is this--okay. Let me see them, yeah.
Senator Dorgan. Yeah. You'll see the list.
Mr. Skilling. Okay.
Senator Dorgan. General Electric is on the list and they
had 24 subsidiaries. But I'd like you to----
Mr. Skilling. Now wait. Now, you know, I hate to be
skeptical, but----
Senator Dorgan. Well, in this room it is a common thing
these days.
Mr. Skilling. Yeah.
Senator Dorgan. Especially today.
Mr. Skilling. Certainly is. General Electric, GE Capital
Corporation had multiple investments with us in subsidiaries. I
would imagine they had more investment subsidiaries in
partnership with Enron than 24. I mean what is this chart? Is
this General Electric Corporation, or have you picked up all of
the subsidiaries? How can you do business--General Electric
does business in several hundred countries around the world.
They would have to have a separate incorporated business in
each----
Senator Dorgan. Yeah. Well, Mr. Skilling, this----
Mr. Skilling [continuing]. One of those countries.
Senator Dorgan [continuing]. Is a report off their 10-Ks.
But I, you know, we can have another hearing on General
Electric.
Mr. Skilling. Well, I mean just think about it logically.
Senator Dorgan. I'm very interested in Enron at this point.
Mr. Skilling. Just think about it.
Senator Dorgan. So if you could describe for me as the CEO
of Enron, former CEO of Enron, your subsidiaries, and
especially those subsidiaries in tax havens.
Mr. Skilling. I guess all I can say is I would imagine that
if you got the accurate numbers there, I would imagine you
would not see as much difference between Enron and other
companies. I do not know what the specific purpose of each
offshore subsidiary was, but I know, for example, in every
single country where we operated we had to have a separate
subsidiary. We had to have a separate subsidiary for every
single project we entered into. And there is no way that
General Electric operates in fewer than 24 countries. I mean it
just--it does not make any sense.
Senator Dorgan. Well, we'll have further dialog about that.
I'll submit some questions to you.
Mr. McMahon, I just have two other questions, then we'll
finish.
Mr. McMahon, I know that the company offered bonuses to get
people to stay just prior to bankruptcy. And that also is
controversial, especially because so many people lost so much
money. I believe you were given a $1.5 million dollar retention
bonus; is that correct?
Mr. McMahon. That is correct.
Senator Dorgan. And was that common? How many people in
Enron just prior to bankruptcy got bonuses to convince them to
stay? And was a million-and-a-half necessary to convince you to
stay at Enron?
Mr. McMahon. Let me answer your first question first. I
believe the number of retention bonuses ranged into the
hundreds of employees. I'm not precisely sure of the exact
number. And at the time, the Board authorized this; I was not
part of this decision. But frankly, it probably was not
necessary for me to receive that amount to stay.
Senator Dorgan. Ms. Watkins, did you receive a bonus to
stay?
Ms. Watkins. No, I did not.
Senator Dorgan. You understand why some people down at the
bottom would be furious with all this? I mean, there is a lot
of money flying around if you look at the history of this
company in recent years, a lot of money moving around quickly.
Mr. Skilling has said nothing about Mr. Fastow today
really, but if I were Mr. Skilling, I think knowing what I
know--and I've read a substantial amount about what happened
here, I would think that Mr. Fastow deceived people inside the
corporation, or they knew what he was doing and acquiesced to
it, but one of the two. But yet, I do not hear anybody talking
about who did something inside the corporation that was
inappropriate, except the Board of Directors.
The Board of Directors issues a best-case report that is
scathing about what happened inside this company. And now, you
know, I'm going to mention the bonuses. I'm sorry to do that,
Mr. McMahon. I know that no one has raised any questions about
your role. You say you went to see Mr. Skilling to complain
about the circumstances in a very similar way that Ms. Watkins
complained and Mr. Skilling turns that discussion into a
discussion about compensation whenever we raise this issue. I
assume it was more than compensation, it was what you said it
was.
But Mr. Skilling says Ms. Watkins is wrong, Mr. McMahon is
wrong, the Powers Report is wrong, the market is wrong. You
know, Mr. Skilling, I have great difficulty believing your
testimony. I wish I could believe your testimony, but somebody
was not home at the Enron Corporation.
Mr. Skilling. Is that a question?
Senator Dorgan. Well, no, it was a statement. I regret
having to make the statement, but you're sure welcome to
respond to it if you like. I can put it in the form of a
question if you'd prefer.
Mr. Skilling. I think if you're suggesting that--well, let
me start off. I do not think that my description of the meeting
is radically different than Jeff's.
Senator Dorgan. It is.
Mr. Skilling. Everybody has a meeting. It is not. I have
said that Jeff raised the issue of conflicts of interest. I did
not say it was strictly a compensation issue, he raised an
issue of conflicts. We had a process in place that was approved
by the Board and he was raising some other issues. My
recollection--and, you know, Jeff probably has a better
recollection because he probably thought about it more than I
did in retrospect. But my recollection is that compensation was
a key part of that discussion. And I believe that I followed up
and I believe that I--I hope that I put his mind at ease that
he should do what he believed was ethically correct, because I
believe in that. I have heard----
Senator Dorgan. See, you've done it again, Mr. Skilling.
Senator Dorgan. You just created a transition into a new
subject.
Mr. Skilling. I have heard Ms. Watkins' comments, and I
cannot for the life of me see what basis she would have for
suggesting that I would know some of that. I mean, how would
she know that? And I do not see that it is at all inconsistent
that there would be some things I do not know if some people
purposely kept me from knowing some things, which I guess goes
to the beginning of your comment. I do not see why that is so
hard to understand.
Senator Dorgan. Well, I would say this. I'm not a
stockholder and I'm not an employee, but if I were and somebody
at the top was getting $66 million selling shares of stock, I'd
surely want them know everything that is going on inside that
company. Especially when key people, including Vice Presidents,
say what was happening was common knowledge, and especially
when after the Board of Directors issues a report that says
what was going on inside that corporation was, ``appalling.'' I
think there is an expectation that people in that position
would have known.
Mr. Skilling. You now say that you did not know. I regret
very much that testimony, because I think it is at odds with
what Mr. McMahon said, despite the fact that you pivot that
every time you talk about it. It is at odds with Ms. Watkins,
it is at odds with the market assessment of that company, and
it is at odds with the Powers Report.
Mr. Fitzgerald.
Senator Fitzgerald. Thank you, Mr. Chairman.
Ms. Watkins, I have not had a chance to ask you any
questions today. As I'm sure you know, I have great admiration
for your role in bringing to the attention of superiors what
you thought were grievous errors in the way Enron was
accounting for earnings and hiding losses. And I think the
whole country has a great deal of admiration for you, because
it took a lot of courage to stand up and speak out when you
did.
And everything that I've heard you say, both before this
Committee and the House, has made perfect sense to me. The only
thing I'm troubled with is the notion that Mr. Ken Lay was
somehow duped. And I want to ask you a few questions and go
back over why it is that you think that Mr. Lay was duped. You
gave him your letter shortly after Mr. Skilling left the firm.
He left the firm on August 14, 2001. What day did you give him
your letter?
Ms. Watkins. I gave him the anonymous letter on August 15,
2001, and then the full set of memos when we met on August 22,
2001.
Senator Fitzgerald. And you had the meeting for a half hour
on August 22?
Ms. Watkins. Yes.
Senator Fitzgerald. And at that time, you recommended to
him--and in your memo you clearly recommended to him that they
should conduct an investigation; that the investigation should
be handled by a law firm different than Vinson & Elkins because
they were clearly conflicted. They were at the center of
setting up all these partnerships. Is that correct?
Ms. Watkins. Yes.
Senator Fitzgerald. And did you also not recommend to Mr.
Lay that they review the propriety of the accounting for all
the transactions?
Ms. Watkins. Yes. At the heart of my concern was an
accounting concern.
Senator Fitzgerald. It was an accounting concern. Now when
Mr. Lay ordered the investigation though, is not it correct
that he told Vinson & Elkins to do the investigation? He hired
them to do the investigation and that he specifically told them
not to review the accounting issues that you raised.
Ms. Watkins. Well, I learned with the release of documents
that the House did a couple weeks ago that Vinson & Elkins'
investigation had been limited and they had been told to not
second-guess the accounting treatment. They did not indicate
that they had any limits in their review when they met with me
in September.
They also met with me October 16, 2001, in the afternoon.
We had released earnings that morning. We had written off $1.2
billion in shareholders' equity. They told me that--they did
not show me their report, but they said that the conclusion had
been that the accounting, when done, was proper. So they made
accounting conclusions to me. It seems at odds with the fact
that they say that they were not second-guessing the
accounting. It all appears to be somewhat of a whitewashed
report to me.
The reason I think Mr. Lay did not get it was he gets this
report from V&E October 15th saying ``It's all okay, the optics
are bad.'' And he just decided ``Let's unwind it. Let's write
it off, let's get it behind us.'' If he truly understood the
magnitude of manipulating your financial statements I think,
you know, if it were me, I'd do a lot more contingency plans. I
would know that that would upset the market, what would be our
backup on equity and debt finance, what were we going to tell
our investors, what were we going to tell our customers.
We were radio silent for roughly two weeks and we hid
behind the SEC inquiry. When investors would call and say
``What's this about the unwind? What's this about Raptor?'' The
response was always, ``Well, the SEC is investigating, so we're
not going to be able to answer questions about Raptor.'' My
understanding is the SEC phoned us and said ``Do not hide
behind us. If your investors have questions,'' you know,
``answer them.'' We had no ready answer to explain that write-
off, which makes me think he did not get it.
Senator Fitzgerald. But, Ms. Watkins, is not it true that
Mr. Lay specifically instructed Vinson & Elkins, ``Do not
follow Ms. Watkins' recommendation and review the accounting
propriety. Do not review the accounting.'' On page 176 of the
Powers Report it says that ``The result of the Vinson & Elkins
review was largely predetermined by the scope and nature of the
investigation and the process employed.''
Isn't it possible that Mr. Lay was contributing to burying
your concerns by putting in the restriction that they not
review the propriety of the accounting?
Ms. Watkins. That restriction should not have been there,
in my opinion, and it concerns me that it was.
Senator Fitzgerald. It concerns you that it was? I mean it
is like you have raised accounting issues; and it would be like
somebody having some trouble with their car and taking it to
the dealer and say ``Please fix the car, but do not look under
the hood.'' It is a real problem.
And certainly if he had been duped prior to your meeting
with him on August 22, do not you think you de-duped him in
that meeting?
Ms. Watkins. I would think so. I mentioned in my opening
statement that I had been extremely disappointed by the
company's reaction and response to my concerns. And I was
incredibly frustrated, because I do think Mr. Lay missed a
small window of opportunity to salvage the company by ignoring
the obvious, as indicated in the Powers Report.
Senator Fitzgerald. And Mr. Lay is a bright man, is he not?
Do you have an opinion on that? Do you think he is a bright
man? Maybe you do not.
Ms. Watkins. Not after this fall.
Senator Fitzgerald. Did you hear Mr. Skilling's discussion
about his description of the budget process at Enron? Is it
your understanding that Mr. Lay and Mr. Skilling would meet
with the various units to discuss their budgets?
Ms. Watkins. Yes. There was an annual budget process that
occurred in the--typically in the fall of each year for the
following year.
Senator Fitzgerald. Was it your impression that units felt
some pressure to meet their budgets and contribute to Enron's
overall earnings as they had been expected at the beginning of
the year?
Ms. Watkins. Yes. In fact, you know, Mr. Skilling referred
to two alternatives by which we accounted for our equity,
merchant equity investments, that we could hedge them with a
local relation hedge, or we could choose to hedge them with
Raptor. Well, we also had a third alternative, which was to
take normal prudence reserves. In many of those investments,
Avici, I think, Enron invested maybe as little as $5 to $10
million. The company went public, it--the value rose up into
the $170-$180 million range. We took all of that into earnings
at Enron Broadband when we had hold restrictions. The prudent
thing to do was to put a prudency reserve and maybe just take
30 or 40 percent of that gain.
Senator Fitzgerald. Did Mr. Lay and Mr. Skilling ever tell
units to be prudent in their earnings and not to push the
envelope?
Ms. Watkins. I think the business units were under pressure
to meet their earnings targets. So if that was a mechanism by
which they could meet it, they would choose to write up their
equity investments to the maximum amount. And then we were
forced to turn to something like a Raptor vehicle to lock in
that value, and that Raptor vehicle was not a real, true
economic transfer of risk.
Senator Fitzgerald. Mr. Chairman, I know my time is
expired, but I wonder what the--I certainly have many more
questions and I do not want to hold up the other Senators. Do
we want to do another round, or----
Senator Dorgan. Why do not we proceed to Senator Boxer.
Senator Fitzgerald. Okay. Thank you.
We'll come back. Thank you.
Senator Boxer. Thank you. Mr. Chairman, we all know that we
are not prosecutors here; we're not a court. Yet, we know that
it is illegal to sell shares based on insider information. It
is not for us to decide whether that happened. However, I want
to get back to this just to give my own opinion, as it ought to
be examined.
You know, you can talk about number of shares from night to
morning. I used to be a stockbroker. We know if there is a
three-for-one split, you start out with a share, you wind up
with three. You can sell two and still have the one and say ``I
still have as many shares.''
I think the important thing is what the Chairman said. Mr.
Skilling, you and others sold multi-million--almost a billion
dollars worth of insider stock. The fact of the matter is that
you sold $20 million worth before you told those employees
sitting in that room who looked up to you in more ways than
one, to put their money into Enron.
They looked up to you, they looked up to Ms. Olson. And it
was like a pep rally--you had already sold. You should have
told them that. And you should have, if you felt any fiduciary
responsibility when they asked, said, you know, ``Look into
diversifying.'' You mentioned that today in an offhand fashion,
but that is not what we heard.
I want to get to the California case. During the
electricity crisis on Front Line in June 2001, they asked you
``What do you,'' you know, ``the generators seem to be making
so much money.'' And, you said, ``We're the good guys. We're on
the side of the angels.'' That was in June, 2001. In that same
month, you made your now-famous joke referring to the Titanic,
when the Titanic went down, the lights were on.
Today, you give this very good excuse for this horrible
statement here to the California Attorney General with whom you
were so upset. You could have taken him on in a dignified way.
I think it is a little kindergarten for a person in your
position to say ``Well, I'm going to tell a joke against all
the people in California because your Attorney General told a
bad joke about Kenneth Lay.'' I'm sorry, I do not buy it. This
is----
Mr. Skilling. You think the Attorney General's comment was
a joke?
Senator Boxer. I did not agree with his statement that he
made.
Mr. Skilling. Thank you.
Senator Boxer. That is not the point, and it is not the
point to change the subject. You took on the State of
California when you, in talking to the press, described the
company's condition, which was going down. You said that Enron
faced terrible problems because California's electricity crisis
had been solved. That is a direct quote from The San Diego
Union Tribune.
And in the SEC filing in November 2001, at the height of
the money coming into your corporation to keep it alive while
insiders were selling like mad, the SEC filing from Enron's
words, ``The power and gas intermediation business both
benefited from price volatility in 2001.'' So we see what
California meant to you. California was keeping----
Mr. Skilling. Can I respond to that? Those are not
inconsistent comments.
Senator Boxer. I will let you respond, of course, as soon
as I finish what I'm saying.
Mr. Skilling. Keep the----
Senator Boxer. I will stop and let you say as many things
as my----
Mr. Skilling. Thank you.
Senator Boxer [continuing]. Chairman thinks is appropriate.
The fact of the matter is, Mr. Skilling, you told our state
in 1994, California would save billions of dollars by
deregulation. You even put a number on it, Mr. Skilling, $8.9
billion per year. But, that did not happen. Let us see what
happened. Okay? Let us see what happened.
We went from 1999, $7.4 billion total to keep our lights on
and keep our seniors cool in the summer and warm in the winter,
and our agriculture business going, and Silicon Valley going.
If it were a country, California would be the fifth largest
country in the world. Manipulation of a company and an industry
is just wrong, because it hurts the whole country. Electricity
costs went up $27.1 billion in one year. By the way, demand up
4 percent. Demand up 4 percent.
However, you said we were going to save over $8 billion a
year. Well, the overcharges are way more than that, and the
long-term contracts were a ripoff also. So it is many more
billions that we lost, this transfer of wealth from the people
of my state to the robber barons of the 21st century. That is
what I think. So the bottom line is we paid a huge amount, and
the electricity cost was not related to demand.
Now I want to go to FERC for a minute, because FERC was the
only thing between you and total deregulation. What did you do?
You wined and dined a lot of people at FERC, did you not? We
have here the list of the best recollections of FERC people,
decision-makers.
On December 7, 2000, you treated these folks or had lunch
with these folks and with this Daniel Larcamp, Director of
Markets, Tariffs and Rates at FERC, along with seven other FERC
employees. He says ``Several other Enron employees
participating in showing Enron's trading room.'' So was that in
Texas that that occurred?
Mr. Skilling. I have no idea, Senator.
Senator Boxer. Well, he said he had lunch--you were present
at the lunch in Enron's trading room. Would that be in Texas if
this gentleman is correct, his calendar is correct?
Mr. Skilling. Well, we have a number of different trading
floors, but I just do not recall that. We had a lot of people
from government that would come through, because this was all
new and people were trying to understand it. So I would not be
at all surprised----
Senator Boxer. Do you remember your lunch with Thomas
Herlihy on December 7, 2000, Executive Director and Chief
Financial Officer of FERC?
Mr. Skilling. Who? There is a----
Senator Boxer. H-E-R-L-I-H-Y. Do you remember anything like
that?
Mr. Skilling. No, I'm sorry, I do not.
Senator Boxer. Do you know this Daniel Larcamp? Do you
remember who he is?
Mr. Skilling. No.
Senator Boxer. Had lunch with him. Okay. Well, Mr.
Chairman, I will submit some more questions for the record
regarding this series of meetings that Mr. Skilling does not
remember.
Mr. Skilling. Have you gone through----
Senator Boxer. Do you remember any other meetings with FERC
employees or decision-makers at all during the time when
Californians were asking FERC to intervene? Do you remember any
other meetings?
Mr. Skilling. While California's----
Senator Boxer. Yeah.
Mr. Skilling. No, I had----
Senator Boxer. The last six months you were----
Mr. Skilling. I had meetings with FERC commissioners, but I
do not remember in the last six months that I was with the
company that I met with FERC commissioners.
Senator Boxer. Okay. I have one last question and then I am
done. You will be very happy to know that.
Mr. Skilling. You have not asked any questions yet.
Senator Boxer. Well, I will. I said I'm done with my part.
Mr. Skilling. Oh, Okay.
Senator Boxer. I'm making some statements. I just asked you
a question. You just answered that you did not recall.
Now I want to talk to you about overbooking lines. These
are two traders, T-R-A-D-E-R-S. Here is what they say: ``What
we did was overbook the transmission line we had the rights on
and said to California utilities, `If you want to use the line,
pay us.' By the time they agreed to meet our price, rolling
blackouts had already hit California and the price for
electricity went through the roof.''
Another one said: ``We would overbook the lines, which
would cause congestion. The price of power would go up on the
other end and--where the power was being delivered to.''
Do you have any knowledge that this was happening?
Mr. Skilling. What is the----
Senator Boxer. By Enron traders.
Mr. Skilling [continuing]. Reference to?
Senator Boxer. It is about the transmission lines in
California being overbooked by Enron.
Mr. Skilling. Is this the result of the ISO [independent
operating system] loading testimony that was held in, I
believe--I think it was the spring of----
Senator Boxer. Well, let me explain. I'll explain what it
is, because it is in an article here. The trader said: ``Enron
held the transmission rights on path 26, a key transmission
line connecting Northern California to Central California, and
also connecting to path 15, a major bottleneck grid pathway in
Northern California owned by PG&E, which no one broke as a
result of all of this.''
So my question is are you aware that the traders were, in
fact, overbooking the line and congesting these transmission
lines? Were you aware of that at all?
Mr. Skilling. The only thing that I'm aware of, Senator, is
there was a difference of opinion on the rules of the
independent system operator. It was just set up. Well, you know
better than I do when the independent system operator came into
effect. But there was a question as to how you could schedule
and nominate power onto the system. And it turns out the way it
works, it is like, you know, in the New York Mercantile
Exchange. In the New York Mercantile Exchange, in a typical day
probably 200 to 300 BCF of gas is traded. The settlement
location for that is Henry Hubb.
You can only move 300 million cubic feet, so you're trading
something on the order of 700 times the amount of volume that
can physically be moved through a delivery point. So there
would be many cases where you would schedule, nominate
capacity, in anticipation of an offsetting nomination that was
going to be coming later. That is absolutely standard industry
practice. And the ISO looked into one specific case. They said
that their--it is my recollection of what they said, is the
rules were not quite clear.
Senator Boxer. Okay.
Mr. Skilling. And they ended up, I think we resolved it,
said that we would change the rules.
Senator Boxer. Well, Mr. Chairman, I just want to say that,
again, it is changing the subject. We have traders here from
Enron who are saying they did something wrong, but you do not
see anything wrong. And if I could just close and leave.
There was a whole advertising campaign against Governor
Gray Davis. The ads were sponsored by an organization called
American Taxpayers' Alliance. The Governor Gray Davis Committee
has had to file a suit because the people behind these ads will
not come forward. Do you know anything about those ads that
blamed the Governor for the grayouts it was called?
Mr. Skilling. No, I do not, Senator.
Senator Boxer: You do not know anything and you never
talked to anyone who contributed to that fund and----
Mr. Skilling. I----
Senator Boxer. We're going to find out eventually.
Mr. Skilling. I do not know.
Senator Boxer. But you do not know that Enron contributed
or any of your traders, like----
Mr. Skilling. I do not know.
Senator Boxer. Dynegy or--you never--you did not know about
this ad campaign?
Mr. Skilling. I knew there were all sorts of ad campaigns
going on in California.
Senator Boxer. Did you know about that one?
Mr. Skilling. What is it called again?
Senator Boxer. It was called out ``Grayouts from Gray
Davis.'' They began June 18, 2001, before you left.
Mr. Skilling. I do not recall, Senator.
Senator Boxer. Okay. Thank you very much.
Senator Dorgan. Senator Nelson.
Senator Nelson. Senator Boxer, do you need some more time?
Senator Boxer. No.
Senator Nelson. You're certainly welcome to mine.
Senator Boxer. I think I did what I had to do.
Senator Nelson. Mr. McMahon, let me pick up where we left
off. You were describing the master limited partnerships, and
you specifically mentioned EOTT. Are you aware of any other
master limited partnership?
Mr. McMahon. The only other one I'm--that I'm aware of is
Northern Border Pipeline. And I'm not 100 percent certain that
that actually is a master limited partnership.
Senator Nelson. Well, in your opinion, can you explain to
the Committee a description of how a master limited partnership
is structured?
Mr. McMahon. I really cannot with any degree of accuracy.
I'm just vaguely familiar with EOTT as it came across my area
of responsibility over the last month or so when EOTT's
management asked Enron to perform under a credit support
agreement.
Senator Nelson. Mr. Skilling, can you provide to the
Committee a description of how a master limited partnership is
structured?
Mr. Skilling. I'm sorry, Senator, I cannot. I think it's a
tax structure and they're pretty complicated. I do not know.
Senator Nelson. Okay.
Ms. Watkins, we were trying to get the specific label on
this when we were talking earlier. Do you have any information
you can share with the Committee?
Ms. Watkins. No, I do not. I'm not familiar with how master
limited partnerships work.
Senator Nelson. Okay. Let me ask Mr. Skilling. We were
talking earlier about CalPERS and Ontario and how in 1997 and
early 1998 there was a successful involvement of getting
CalPERS and Ontario Teachers' Pension Plan to invest in EES. We
had talked about that. Now, at the same time, you had a
financial stake in EES, did you not?
Mr. Skilling. I do not know. I did not have a--well, I had
a--we had something that was called phantom equity, which was--
you could--when we started new businesses back in the early
1990s we tended to give a piece of the business to the
executives. We started EES, I believe in 1994, and I was given
a piece of phantom equity in that. We converted that to--we did
away with the plan and converted everybody onto standard Enron
stock and options, and I do not recall the specific date of
that conversion.
Senator Nelson. Well, what begs the question is--and we're
looking at this from a standpoint of legislation--is it a
conflict of interest for an officer of a company that has an
interest in an entity of that company to go out and to get
others to purchase into that company in which the officer has
an interest?
Mr. Skilling. Well, you know, it was standard and is
standard industry practice. For example, in the development
business, when you're developing a power plant, typically you
give the developers a percentage of the power plant. And then
they're out finding additional investors because you typically
only want to keep a small sliver. So that would be a standard
industry practice, Senator.
Senator Nelson. Do you think that needs to be changed?
Mr. Skilling. I, quite frankly, have not really thought
about it. I'll think about it and--I do not think it is a
problem. I do not know, I'd have to think about it.
Senator Nelson. Well, you know, we live in a different
world then, because I can guarantee you if any of the Members
of this Committee were trying to get people to buy into
something that they had an interest in there would be people
questioning the conflict of interest. I think that is something
we're going to have to look into, Mr. Chairman, from the
standpoint of the protection of consumers.
Mr. Skilling. No, but I think if the issue is one of
disclosure, I mean my experience has been--and when we would
bring in outside private equity to participate with us,
typically they would insist that management have some sort of
an equity interest in the company. They would insist on that,
so that they had some sort of an incentive. That was the last
plan, to my recollection, where we had that.
And, in fact, we had looked at a number of other businesses
where--in fact, Mr. McMahon was involved in a business where we
were trying to bring in some outside equity and the outside
equity parties demanded that management have a percentage of
the business. And I ended up personally terminating the
discussions or telling them we're not going to do the deal,
because I said, ``We will not put our employees in a position
where they're not working for Enron Corporation.''
So, I think typically it is the private equity partners
that like it. I think from Enron's standpoint, it is a good way
to incent people. So I think it is probably a little different,
but I'll think about it and----
Senator Nelson. Did you have any other financial interest
in any other entity in the company?
Mr. Skilling. When I started with Enron in 1990, I was
given a partial--or one of these phantom percentages in the
wholesale market, when we started that wholesale market. And
then I converted that. In fact, I believe the conversion of
that plan was at my insistence also into just standard Enron
stock and options, I believe in 1994 or 1995, something like
that.
Senator Nelson. Would you provide a list to the Committee
of the entities in Enron that you had a financial interest in?
Mr. Skilling. It is just those two.
Senator Nelson. So state those two then again please for me
for the record.
Mr. Skilling. It is what we called Enron Gas Services,
which later became Enron Capital & Trade; the name changed. And
the other one was Enron Energy Services. They were both kind of
standard phantom plans.
Senator Nelson. Would those entities include private
partnerships as well?
Mr. Skilling. Those were--well, Enron North America, our
merchant business, was 100 percent owned by Enron Corporation.
We never sold an interest in that business to anyone. Enron
Energy Services we sold 7 percent to CalPERS and Ontario
Teachers. Then we ended up buying that back, I believe a year
later, at what turned out to be, I think, a very good
investment for CalPERS and for Ontario Teachers. I think--I
mean the business was great for them. It was a good investment
on their part.
Senator Nelson. I'm sure it was.
Mr. Skilling. ``We'' meaning Enron bought them out.
Senator Nelson. I'm sure it was, but my question was were
you involved in any of those private partnerships? Did that
include your investments in those two entities? Did that
include any private partnerships was the question.
Mr. Skilling. I do not--Senator, I do not think so. I do
not know. Enron North America, or Enron Gas Services was a 100
percent-owned subsidiary. And Enron Energy Services was 100
percent-owned, except for that piece that was sold to CalPERS
and Ontario. And we bought it back, I think after--do you
remember if it was a year? It was a relatively short period of
time.
Senator Nelson. Thank you, Mr. Chairman.
Senator Dorgan. It is my intention to recognize Senator
Fitzgerald for 10 minutes. I will follow that by 5 minutes, and
we will then adjourn the hearing. You have been with us for 5
hours and have been very patient.
Senator Fitzgerald.
Senator Fitzgerald. Thank you.
Mr. Skilling, I wanted to return to the transaction with
the Braveheart Partnership again. That was a situation in which
Enron had a video business, a broadband video business. It
entered some kind of an agreement with Blockbuster. Blockbuster
was going to provide video content, movies, and Enron was going
to beam the movies to people's homes via their broadband video
network. And that business was a fairly new business. My
understanding is it just existed, at its height maybe had 1,000
customers. Is that your recollection?
Mr. Skilling. I do not know what the final number was. We
were in a beta test in Portland, Oregon; Salt Lake City; New
York City; and one other city, I forget which. But, at that
point it was a beta test.
Senator Fitzgerald. And that was the point in time in which
Enron sold that business?
Mr. Skilling. Sold a portion of the business.
Senator Fitzgerald. Just a portion of the business?
Mr. Skilling. Yes.
Senator Fitzgerald. What portion of the business did you
sell?
Mr. Skilling. I think it was--I cannot tell you exactly,
but I think it was the first 10 years of--it was a share in the
first 10 years of cash-flow in the business, something like
that.
Senator Fitzgerald. Okay. And you were not sure who it was
sold to? You did not know who it was sold to. You said that
before.
Mr. Skilling. No. No, I knew the name of it was Project
Braveheart, was internally what the project name was. I do not
know who the counterparty, the specific counterparty was in the
transaction.
Senator Fitzgerald. Now my understanding based on newspaper
accounts--and I do not have the original documents--is that the
Braveheart partnership was created to receive, I guess that 10
years of earnings or revenues on that Blockbuster video
business. And that partnership went out and found an investor
in Wood Grundy, the investment banking arm of the Canadian
Imperial Bank of Commerce.
And my understanding is that Canadian Imperial Bank of
Commerce, Wood Grundy, was going to take the earnings of that
business, maybe it was for the next 10 years, in return for
supplying the partnership with $115 million. My understanding
is also that Enron promised to guarantee that Wood Grundy would
get back the $115 million that it put into the deal. If for
some reason the video business did not pan out, Enron would
insure that the bank in Canada would get its money back. Is
that your recollection?
Mr. Skilling. I do not know the specifics of the
transaction, Senator. I mean, I would have known that there was
a sale. I mean, you know, you'll pick up--it is a big company,
but I knew that we were in the process of selling a portion of
what we called our content services business, which is what
you're describing. And I believe we ended up selling. I do not
know the specific nature of the transaction, the specific terms
and conditions, or the pricing of it.
Senator Fitzgerald. We discussed earlier that Braveheart
paid $110 million to Enron, which Enron booked into earnings
over two quarters, $54 million in the fourth quarter of 2000
and $54 million in the first quarter of 2001. Do you recall
that?
Mr. Skilling. I've read the newspaper account, so, yes.
Senator Fitzgerald. But you do not recall when you were at
Enron booking $54 million in earnings from that during your
first quarter as CEO of the company?
Mr. Skilling. Yeah. If you'd asked me, I would not have
remember the number, but I have subsequently read in the papers
what the number is.
Senator Fitzgerald. Now that business that you sold 10
years worth of the revenues from, was that worth $110 million?
It did not really have any paying clients, did it, at that
point? Did it have any paying clients?
Mr. Skilling. I--we were in beta test, so I do not know
offhand. Was it worth that much money? Yeah. I mean if you look
at the enthusiasm that there was for broadband applications at
that time. We had the only working online, effective video on
demand platform in the country. And video on demand was a very
exciting concept.
It is a very exciting concept where it is like a simulated
VCR, where you can buy a movie from Blockbuster or from a
studio, you can stop it, you can fast forward it, you can
return it, rewind it, but you do not have to return it to the
store. I mean, all you do is you just call it up on your
screen. We had a whole list of movies. You could pick which
movie you wanted. When you picked that movie, it stayed in a
server close to your home for 3 days, and at the end of the 3
days, it would be taken back. So it was very, in my opinion,
and I think most people in the industry, this very powerful----
Senator Fitzgerald. So you thought it was reasonable to
take into earnings $110 million based on the sale of 10 years
worth of revenues?
Mr. Skilling. Yeah. Selling a piece of that business right
then, I think I--my guess is----
Senator Fitzgerald. Thought that was reasonable, yes or no?
Mr. Hiler. Excuse me. Let me just make sure you answer the
question. I think he is already answered that he did not know
the figure that was----
Mr. Skilling. Right, the specific----
Mr. Hiler [continuing]. Taken in earnings. He answered you.
Mr. Skilling. Was--I do not know the specifics of the
transaction. Was there a tremendous hunger on the part of
investors for access to investment vehicles in video----
Senator Fitzgerald. Okay.
Mr. Skilling [continuing]. Absolutely.
Senator Fitzgerald. Were you aware that Enron Corporation
had made some kind of a promise to pay the Canadian bank back
if that business did not earn back the bank's investment?
Mr. Skilling. No, I did not know that.
Senator Fitzgerald. You were not aware of that. So somehow
the corporation gave some kind of a guarantee, something akin
to a guarantee, and you as a CEO were not aware of that.
Somebody could guarantee a $115 million debt without the CEO
knowing?
Mr. Skilling. Yeah. I would imagine that the approval
authority for a credit guarantee would be lower than for a
cancellation. I just do not know. I do not recall, Senator.
Senator Fitzgerald. It was a pretty good way to create
earnings though, is it not, if you can effectively have a
partnership borrow money. Enron can guarantee it so that the
partnership can borrow all the money it would like, and then
pay it to you and you'd just report that borrowed money as
income. Does that make sense to you, Mr. Skilling?
Mr. Skilling. You would have to talk to the accountants
about that. I mean I, if the accountant said, you know, and I'm
sure----
Senator Fitzgerald. This is not an accounting issue. This
is a valuation issue. I'm not questioning the accounting. I
think the accounting may have been 100 percent according to----
Mr. Skilling. Right. If you're saying was it worth
something, asolutely.
Senator Fitzgerald. This is a valuation issue, not an
accounting issue. I want to----
Mr. Skilling. The valuation of the partnership interest, I
mean at this time, this--people were so enthusiastic about
this.
Senator Fitzgerald. Well, how did Enron get $110 million?
Why not $50 million? Not what--why not $500 million? How did
they pick the $110 million value?
Mr. Skilling. I do not know, but I would guess that they
were looking--my guess would be they were looking at comparable
technology companies at that stage of development to see what
they were selling for.
Senator Fitzgerald. As CEO, did you want any procedures in
place to insure that Enron got fair value for assets that it
sold?
Mr. Skilling. We had lots of procedures in place. We had a
group that was called a risk assessment and control group that
would have done absolute strip-down of that transaction to see
if we were getting fair value for it. That would be standard
operating practice inside the company.
Senator Fitzgerald. Now it turns out in that case you got
more than fair value; is that not right? Because ultimately,
that business fell apart completely and wound up being
worthless; is that not correct? And that was before you
departed the company.
Mr. Skilling. Well, in retrospect, I think it turns out
that we all, not just me, but I think several million people
significantly overestimated the opportunities available in the
broadband business and the electronic delivery business.
What the problem was, I mean the problem turned out to be
the last mile. We could not get enough direct access over the
last mile. We had enough backbone to provide the video on
demand. We had plenty of backbone and capacity and fiber to get
the movies out to the extremities of the network, but we could
not get through the last mile.
Senator Fitzgerald. Mr. Skilling, it is not just that video
business that you sold to partnerships. You sold lots of other
Enron assets to partnerships and were paid lots of money for
it, and in many of the cases it appears that Enron--or the
partnerships had borrowed the money to pay Enron for those
assets and that Enron had either guaranteed the borrowings or
provided some kind of credit support for it.
Mr. Skilling. Was providing some portion----
Senator Fitzgerald. So that it looks to me----
Mr. Skilling. You do not have to go through specific
transactions. I'll give you an example, Senator. If you sell
your house, a lot of people when they sell their house provide
seller finance. And it is still a sale, I mean, once you've
sold and you're taking a credit risk on the counterparty that
has purchased that house. That can be entirely appropriate in
many, many circumstances. To the extent that we were providing
financing, we had a finance company.
Senator Fitzgerald. Did you consider these seller
financing?
Mr. Skilling. To the extent that I--we'd have to look at
the very specific transaction and what the structure of it was,
but if someone had said to me that someone was buying something
from us and we were financing a portion of that purchase, I
would have said, ``That's no different than General Electric
financing washing machines.'' It is a natural----
Senator Fitzgerald. And was the seller financing all
disclosed in your filings with the Securities Exchange
Commission?
Mr. Skilling. The balance sheet would show every time we
had an accounts receivable. Yes, sir.
Senator Fitzgerald. That you had, in fact, financed the
purchaser's purchase. That is all disclosed?
Mr. Skilling. Senator, we did, in a typical year, I would
imagine we did 30,000 or 40,000--maybe more than that, maybe
50,000--transactions. Did we separately disclose every single
transaction? You could not do it. I mean, you'd be sending the
investors a phone directory, you know, something of that size
that had the information in it.
Senator Fitzgerald. Is this typical seller financing though
when it is not really an independent third party, when it is
really a partnership that you own 97 percent of? Are not you
really just doing seller financing almost to yourself?
Mr. Skilling. Senator, you're--you have to ask the
accountants what the logic is that they used. But when they
came to us, they believed that our----
Senator Fitzgerald. It is not an accounting issue.
Mr. Skilling. Why is that not an accounting issue?
Senator Fitzgerald. That is not the issue I'm raising. I'm
just saying----
Mr. Skilling. Okay, then I'm missing something. Try it
again.
Senator Fitzgerald. I mean you're selling assets to
something that you own 97 percent of.
Mr. Skilling. Right.
Senator Fitzgerald. And you're booking revenues based on
those sales.
Mr. Skilling. Right. So they----
Senator Fitzgerald. Even though you are liable contingently
for the indebtedness incurred by the partnership.
Mr. Skilling. Well, I'll give you an example of where that
would be entirely appropriate. Let us say that I had a mortgage
pool; I had a pool of mortgages. And I put them into a pool and
I put 3 percent sliver of equity in and I sold it. Now, once
you've done that, you have transferred risk, 3 percent risk.
Turns out mortgages are real safe. You know, the default rates
are pretty low. And so the accountants look at that once that
risk transfer has occurred. They look at that and they say has
the risk transferred? If the risk transfers, you have to
account for it as a sale transaction.
So I would have to look at each of the individual
transactions. I cannot. I'm not an accountant, so I would not
be able to look at it. But was it appropriate to book revenue?
Ask Arthur Andersen. If it was inappropriate, we would not have
done it. If it was inappropriate, if there was any time that
there was anything that I was aware of that was inappropriate,
we would not have done it.
Senator Fitzgerald. Now were you aware that the company
built up $20 billion in off balance sheet indebtedness in this
manner? And that is why you had to file bankruptcy, is it not,
because those debts were coming due and you could not pay them?
Mr. Skilling. I refer you again to the 10-K on page 72. It
actually--it lists it out in detail.
Senator Fitzgerald. So you were totally aware of it, of all
the off balance sheet indebtedness?
Mr. Skilling. And so was everyone else. So were the rating
agencies, so was everyone else. There was no attempt to hide--
--
Senator Fitzgerald. It never occurred to you that this was
too much debt to be--you were not concerned about how much debt
you were incurring?
Mr. Skilling. We went to the rating agencies and we would
show them what our balance sheet was. We would show them those
same disclosures. They would go through and they'd look at it.
And they looked at it and they said we were BBB plus. Now is
that a reasonable number? I think so. We had a great business.
We were a major, major player in a very fast growing business
in energy wholesaling. That business was highly, highly
profitable. We would have made--if this catastrophe had not
occurred, I believe strongly that we would have made $220-
$225--$2.20-$2.25 per share of real live earnings in the year
2002. Put any kind of multiple against that. Put a 20 multiple,
put a 10 multiple against that. The stock price at a minimum
should have been in the $20 to $30 range.
Senator Fitzgerald. Enron just experienced a liquidity
problem last fall?
Mr. Skilling. We had a run on the bank based on a loss of
confidence that was related to all of this.
Senator Fitzgerald. But when they went into the bankruptcy
it turns out that people are not going to get 100 percent back
on the dollar, are they, creditors are not?
Mr. Skilling. Any time you go into bankruptcy, all
accounting, all balance sheet transactions assume an ongoing
business. Once you put a company through bankruptcy, I
guarantee you you are going to get a haircut on every asset
that you have.
Senator Fitzgerald. Mr. McMahon, what percent on the dollar
do you think that creditors of Enron are going to get in the
bankruptcy? Are they going to get over 50 percent on the
dollar?
Mr. McMahon. Senator, I'm afraid it is way too early to
even make that analysis yet, but it is certainly less than 100
cents on the dollar. We've recently disclosed that we believe
the recovery on the equity to be----
Senator Fitzgerald. Unattached.
Mr. McMahon. Basically zero, right. No----
Senator Fitzgerald. On the equity, well, certainly the
equity's wiped out, but what about on the debts?
Mr. McMahon. Right. Well, that is my point. Since the
equity's not going to get anything----
Senator Fitzgerald. Think it will be more than 50 cents on
the dollar?
Mr. McMahon. It is just too early to tell.
Senator Fitzgerald. Mr. Skilling, I dispute the notion that
if it is a solvent bank, if it were liquidated that it could
not pay off all its depositors. A solvent bank would liquidate
its government bonds. If its loans were what they said they
were and it was a solvent bank, they would liquidate and sell
the loans, and they would have capital and surplus left over
and everybody would get paid off. You only have a problem and
cannot pay off creditors if, in fact, your liabilities exceed
your assets. And my understanding from what I've read is
Enron's going to be paying somewhere like 35 cents on the
dollar back to its creditors.
Mr. Skilling. Senator, you may be a great Senator, but when
it comes to understanding what happens in bankruptcy, I would
suggest that if you put General Motors into bankruptcy
tomorrow, they are not going to be able to sell their machine
tools for 100 cents on the dollar. That is just not what
happens. When we used to have runs on the banks in the late
1880s, as soon as that run began it was, ``Katie, bar the
door,'' because then the lenders, the people that had borrowed
the money decided they did not have to pay it back; they were
taking liquidity away from the corporation.
It is almost impossible--that is why it is so important
that the company got a couple of months. If the company had a
couple of months of breathing space, I think things would have
turned out okay. The company was solvent. The financial
statements suggested the company was solvent. It was illiquid,
not insolvent.
Senator Fitzgerald. Mr. Skilling, one of the first bank
boards my father was on in the 1950s, in those days they used
to liquidate banks, and it was because the owners just wanted
to get their investment back. And they simply liquidated the
bank and they paid off everybody and paid their shareholders a
return. I submit to you that if a company is fully solvent, it
can pay all its debts back and pay back its retained earnings
against capital and surplus. I agree that----
Mr. Skilling. In 3 days? If--in 3 days, if your creditors
are saying I want the money right now, you cannot do that.
Senator Fitzgerald. Obviously you cannot do it right away,
but over a period of time you can. And Enron got a timeout from
the bankruptcy and it is only going to pay back 35 cents on the
dollar.
Mr. Skilling. Enron has now got----
Senator Fitzgerald. It has way more liabilities than
assets.
Mr. Skilling. Enron has got lawsuits from any of a number
of claims. Once this thing happens, once you cross that corner,
it is very hard to turn around and go back the other direction.
I mean that is just the----
Senator Fitzgerald. All right.
Mr. Skilling. That is the way it is always been.
Senator Fitzgerald. If I could go to Mr. McMahon, I'm going
to wrap up. I want to let all of you out. And my good Chairman,
Senator Dorgan, who has been very indulgent, I appreciate it.
Mr. McMahon, Ms. Watkins was in the company in the CFO's
office for what, six weeks, Ms. Watkins, before you figured out
that it was all a house of cards?
Ms. Watkins. Probably four to six weeks.
Senator Fitzgerald. Mr. McMahon, you were at Enron for many
years. You were treasurer from 1998 to March of 2000. Did you
not figure out it was a house of cards in all that time?
Mr. McMahon. No. Frankly, the first time I saw Enron having
financial problems was when I took over as CFO in the middle of
the crisis. And it was very clear at that point in time that
there was, in fact, an inability for the company to access
capital in the capital markets, in the bank markets. That was
my first clue that there was a major financial crisis at this
company.
Senator Fitzgerald. So this all just went right over your
head all those years that you were there as treasurer?
Mr. McMahon. Even as Treasurer, I thought we had strong
businesses, and was not until I saw it in late October that--it
was not long before that that our CFO had told quite a lot of
management that the balance sheet was in extremely good shape.
Senator Fitzgerald. And finally, wrapping up the first
question I asked you. I have some more details about that
report the auditors gave in April 1987 to the Enron Board. They
recommended to the Enron Board in April 1987 that the two rogue
executives who had misappropriated money in New York, that they
be terminated immediately, and they were kept on at least three
or four months after that. And during that time, a control
officer from Enron was supposed to go out and watch them, and
somehow he was delayed several months in going out to watch
them. And then during these three to four months that these
rogue traders remained at Enron Oil, they ran up $1 billion in
bad trades.
And then Rudy Giuliani, who was U.S. Attorney at the time,
started a prosecution investigation in the fall of 1987. The
two eventually pled guilty to over $100 million in bad trades
and fraud. One served time in jail and the other was put on
probation. And I said in that Vanity Fair article that I
introduced into the record earlier, that Mr. Lay was the one
who resisted terminating these employees, even though it was
the unanimous recommendation of the team of internal auditors
and external auditors. And my understanding is you were on the
term of external auditors at Arthur Andersen at that time; is
that correct?
Mr. McMahon. Yeah. In 1987, I was a--I think a junior
manager at Arthur Andersen.
Senator Fitzgerald. But you were--did go to New York?
Mr. McMahon. Yes.
Senator Fitzgerald. Do you remember the recommendation to
the Enron Board?
Mr. McMahon. I do not recall. I mean, I know there was an
internal control recommendation made, but I, you know, that was
prepared by the partner and the senior manager on the job.
Senator Fitzgerald. So you were not involved in that----
Mr. McMahon. Well, I was involved in the detailed audit
work at the offices in New York.
Senator Fitzgerald. And you never heard anything about:
Boy, they were awful slow to terminate those two execs who
apparently just took money and put it in their own account that
was Enron money?
Mr. McMahon. I do not recall. I mean, it is 15 years ago.
Senator Fitzgerald. Okay, okay.
Thank you very much, Mr. Chairman and all the panelists.
Thank you for being here. Thank you.
Senator Dorgan. Let me just finally ask Mr. McMahon. Have
you read the Powers Report?
Mr. McMahon. Yes, I have.
Senator Dorgan. Do you agree with it?
Mr. McMahon. I do not think I know enough of the details or
agree with one or the other. It raises some very, very serious
concerns which we are investigating currently. We've made some
very significant personnel changes as a result of it.
Senator Dorgan. Have you fired people as a result of it?
Mr. McMahon. Yes, we have.
Senator Dorgan. How many?
Mr. McMahon. Well, the Chief Accounting Officer and Chief
Risk Officer have been discharged. The General Counsel has
resigned, and we've made some internal moves within the
accounting department to give it new leadership, as well as our
auditors have been discharged.
Senator Dorgan. You fired employees because there was
something wrong, something going on wrong that the Board of
Directors' report steered you to. Is that the basis of the
dismissals?
Mr. McMahon. Yeah. I believe those--the Chief Risk Officer
and Chief Accounting Officer were discharged for cause pursuant
to a Board request.
Senator Dorgan. Is that at odds with what Mr. Skilling is
telling us today, that really things were fine?
Mr. McMahon. I mean I--obviously the Powers Report brought
to light some things that I do not--well, certainly the Powers
Report brought things to light that needed some changing.
Senator Dorgan. Were they the things that you were
attempting to bring to Mr. Skilling's attention many, many
months before that?
Mr. McMahon. Well, the Powers Report clearly talks about
the conflicts of interest that I was concerned about, but I
think it obviously goes on to specific transactions which I was
not aware of at the time I brought that up to Mr. Skilling.
Senator Dorgan. And do you believe Mr. Skilling was unaware
of all of this?
Mr. McMahon. I really do not know.
Senator Dorgan. But you believe you made Mr. Skilling aware
of some of it?
Mr. McMahon. Oh, clearly as far as the structure of the
conflict internally. You know, I recall very clearly our
conversation. It was a very big event in my life at that point
in time. So my meeting with Mr. Skilling was, after several
meetings with my boss and then the Policy Committee above my
boss and going to Mr. Skilling, I have a vivid recollection of
that.
Senator Dorgan. That recollection is different than Mr.
Skilling's recollection. Mr. Skilling testified in the House
that you came to see him about compensation, and he had no
recollection of discussion beyond the issue of compensation; is
that correct?
Mr. McMahon. That is the understanding--that, to me, is Mr.
Skilling's testimony. And I did mention compensation as a
symptom in that meeting, but I obviously had wider concerns
than compensation.
Senator Dorgan. Let me ask Ms. Watkins, if I might. The
import of your testimony before the U.S. House was to suggest,
I think, at least as it was interpreted by the media, was that
Mr. Lay was sort of the unwitting, innocent victim here, ran
the company but did not really know very much. Was that your
intention when you testified? Is that a fair assessment of Mr.
Lay's role in the corporation?
Ms. Watkins. I'm drawing that conclusion based on my eight
years at Enron, where I worked with a very hands-on Rich Kinder
as COO and a very hands-on Jeff Skilling as COO. I never had
very much interaction with Mr. Lay. This fall, when I did have
interaction and when I conveyed my concerns, I was extremely
disappointed by his inability to grasp the dire situation the
company was in. His actions of writing this off with just no
contingency plans reaffirms my opinion that he did not get it.
Senator Dorgan. Did not want to get it or did not get it? I
mean you actually served it to him.
Ms. Watkins. Well, could be a little bit of both, could be
a little bit of both.
Senator Dorgan. But you actually served it up on a platter,
did you not, to say ``Here is the situation as I see it. And by
the way, do not ask Vinson & Elkins to look into it.'' And what
he did is he asked that particular law firm to look into it,
and then restricted the law firm's view with respect to the
accounting pieces. I'm just trying to understand what you're
saying about Mr. Lay's role. Mr. Lay came here and did not
testify.
Ms. Watkins. I'm just giving you my opinion based off my
interactions with the people that I worked with at Enron. And
this was such a grave issue, and to see it written off and
unwound, and we did not even have an explanation ready for
investors. October 23, at an all employee meeting to address
the write-down, Mr. Lay likened this crisis to poor investment
decisions we had made, to the Peruvians nationalizing our oil
company in the 1980s. It is completely different.
Senator Dorgan. We are trying to get the names of the
investors in all of the partnerships and having an almost
impossible time getting them.
Mr. McMahon, you're the President and COO of the company at
this point. I assume those records exist somewhere. I have
talked to the interim CEO, his attorney has called us back; I
received some piece of information that was indecipherable to
me a couple days ago. But this Committee intends to search for
the names of all of the investors in all of the partnerships,
and I'm wondering if you, as a President of the corporation,
will be helping us in achieving that goal.
Mr. McMahon. We'll--Senator, we'll obviously cooperate, as
we have been, fully. But please keep in mind these partnerships
were not sponsored by Enron, they are outside. So those
documents would not typically reside in the Enron offices,
although as I understand our internal investigation sought--
searched for those. So we'll continue to cooperate.
I do understand there is one particular one on LJM2; the
limited partners have filed a lawsuit in the State of Delaware.
And so, I think part of their lawsuit, those who've filed
motions against the general partner, I think that is a matter
of public record on the court's website.
Senator Dorgan. But let me ask you, if an accountant comes
to you today as President of the company and says, ``All right.
Here is a partnership, an off-the-books SPE partnership, and
Enron owns 97 percent of it, I want to see the records. I want
to verify that the other 3 percent is non-Enron. Show me the
records.'' What are you going to show the partner, nothing?
You're going to have to have the records, are not you?
Mr. McMahon. Sure. I think on these partnerships you're
talking about today, the LJM, et cetera, the--I do not know
what due diligence was done by the accounting group at the
time. Clearly going forward, whether we ever do another SPE
again is another question, but clearly, due diligence efforts
for Enron going forward would be much more stringent.
Senator Dorgan. Well, I must tell you that reading the
Board of Directors' report, it appears to me that due diligence
is a term that is totally unknown inside that corporation. The
construction of some of these partnerships according to the
Board of Directors report itself, paid no attention to due
diligence.
But let me make a final point.
Mr. Skilling, at the start of today you were credited for
testifying. I will similarly give you credit for coming. I must
say that it was disappointing to me that Mr. Lay would not
testify. He has every right not to testify.
I appreciate your testifying, Mr. Skilling, but I must tell
you that as I listened to your testimony, there are times when
that Harvard MBA shows through very well. You are articulate,
incisive in your analysis of complex financial transactions,
and then, when pressed on the Board of Directors investigative
report you seem to me to lapse into utter confusion about
accounting. And somehow, it just does not fit.
I do not know that we've gotten much closer to the truth
today. We have to keep digging, it seems to me. This is a
miserable way to spend a Tuesday, as a matter of fact, but then
it is a small price to pay compared to the loss of people that
have lost their life savings and lost their jobs and lost their
investments. So, we have to continue this process.
It is not pleasant for you to come and sit at a table for
five-and-a-half hours. The Committee appreciates the fact that
you are here today, and we will be conducting about four
additional hearings dealing with other aspects of this. You
have been very patient for five-and-a-half hours and the
Committee appreciates your attendance.
This hearing is adjourned.
[Whereupon, at 5:37 p.m. the hearing adjourned.]