Text: Letters from Reps. Tauzin, Greenwood




Monday, January 14, 2002

Following is the text of letters from House Energy and Commerce Committee Chairman Billy Tauzin (R-La.) and Oversight and Investigations Subcommittee Chairman James Greenwood (R-Pa.) to Enron Chairman and CEO Kenneth Lay, Andersen Managing Partner and CEO Joseph F. Berardino and Joseph C. Dilg, Managing Partner at Vinson and Elkins.

January 14, 2002

Mr. Kenneth L. Lay
Chairman and Chief Executive Officer
Enron Corporation
1400 Smith Street
Houston, Texas 77002

Dear Mr. Lay:

As you know, the Committee on Energy and Commerce is investigating matters relating to the financial collapse of the Enron Corporation (“Enron”). As part of this investigation, the Committee requested and received thousands of pages of documents from Enron, its auditing firm Andersen, and other individuals involved with Enron. During the course of reviewing these documents, Committee investigators uncovered an Enron document that raises troubling questions about the extent to which you and other senior officials at Enron and Andersen were aware of the controversial financial transactions and accounting practices that would ultimately contribute significantly to Enron’s demise. The Committee’s investigation also uncovered that Enron requested and received a legal review of such matters dated October 15, 2001 -- one day before Enron announced its third quarter earnings and the $1.2 billion reduction in shareholder equity due to losses later associated with various partnerships involving Enron officials.

Specifically, in August 2001, a knowledgeable Enron employee wrote a letter to you as Enron’s chairman and chief executive officer, questioning the propriety of Enron’s accounting treatment of certain “related party” transactions and deconsolidated “special purpose entities.” In that letter, the employee identified several areas of concern, including the ownership interest of Andrew Fastow, Enron’s then-current Chief Financial Officer, in the LJM partnership, Enron and Andersen’s accounting treatment of Enron’s Condor, Raptor, and Whitewing entities, the adequacy of the public disclosure of these entities, and the potential impact on Enron’s financial statements due to the decline of Enron’s stock and the merchant investments placed in these entities.

The employee described a “veil of secrecy around LJM and Raptor,” and noted that several senior Enron employees “consistently and constantly” questioned the corporation’s accounting methods to senior Enron officials, and directly to Jeffrey Skilling - Enron’s former Chief Executive Officer - regarding the LJM transactions. More specifically, the employee told you:

We recognized over $500 million of fair value gains on stocks via our swaps with Raptor, much of that stock has declined significantly – Avici by 98%, from $178 mm to $5 mm, The New Power Co by 70%, from $20/share to $6/share. The value in the swaps won’t be there for Raptor, so once again Enron will issue stock to offset these losses. Raptor is an LJM entity. It sure looks to the layman on the street that we are hiding losses in a related company and will compensate that company with Enron stock in the future.

I am incredibly nervous that we will implode in a wave of accounting scandals. . .

Is there a way our accounting guru’s can unwind these deals now? I have thought about how to do this, but I keep bumping into one big problem – we booked the Condor deals in 1999 and 2000, we enjoyed a wonderfully high stock price, many executives sold stock, we then try to reverse or fix the deals in 2001 and it’s a bit like robbing the bank in one year and trying to pay back 2 years later. Nice try, but investors were hurt, they bought at $70 and $80 dollars looking for $210/share and now they’re at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled “redeployed” employees who know enough about the ‘funny’ accounting to get us in trouble.

(Emphases added.)

The letter recommended that Enron conduct investigations by an independent law firm and by an independent accounting firm for the purpose of analyzing transactions in detail and opining as to the propriety of the accounting treatment employed by Enron and Andersen. The Committee understands that the employee subsequently met with you for one hour to discuss her concerns, and that she provided supplementary documentation to support her claims. The Committee also understands that senior Enron officials instructed Vinson & Elkins L.L.P. (“Vinson & Elkins”) to conduct a general review of the letter’s allegations to determine if they “raised new factual information that would warrant a broader investigation,” but that Enron specifically told Vincent & Elkins not to “second guess[ ] the accounting advice and treatment provided by” Andersen, nor to engage in a “detailed analysis” of the particular transactions at issue. As part of that limited review, Vinson & Elkins interviewed several then-current Enron and Andersen employees, including Fastow and David Duncan, Andersen’s Partner-in-Charge of the Enron account.

The Vinson & Elkins review concluded that the concerns expressed by the Enron employee did not warrant a “further widespread investigation by independent counsel and auditors,” given that they raised no facts that had not either been known or disclosed by company officials and auditors. The Vinson & Elkins report, however, did express concern that, “because of bad cosmetics involving the LJM entities and Raptor transactions, coupled with poor performance of the merchant investment assets placed in those vehicles and the decline in the value of Enron stock, there is a serious risk of adverse publicity and litigation.” As noted in the Vinson & Elkins letter to Enron, their review and conclusions were reported directly to you, the entire Audit Committee of Enron’s Board of Directors, and Enron’s General Counsel.

In order for the Committee to gain a more complete understanding of the events surrounding this particular matter, we are requesting that, pursuant to Rules X and XI of the U.S. House of Representatives, Enron produce to the Committee the following information by January 28, 2002:

1.All records relating to any investigation or review of the allegations raised by the Enron employee in August 2001, including but not limited to the review done by Vinson & Elkins at Enron’s request and any internal Andersen or Enron review.
2.The names of all Enron employees who were interviewed, participated in, or from whom any information was requested, as part of any investigation or review referenced in Request No. 1.

Please note that, for the purpose of responding to these requests, the term "Enron," as used above, means Enron Corp., or one or more of its divisions, subsidiaries or affiliates, or related entities. The terms "records" and "relating" should be interpreted in accordance with the attachment to this letter. If you have any questions, please contact Mr. Mark Paoletta, Chief Counsel for Oversight and Investigations, at (202) 225-2927.

Thank you for your prompt attention to these matters. We appreciate your continuing cooperation with our investigation.

Sincerely,

W.J. “Billy” Tauzin
Chairman
James C. Greenwood
Chairman, Subcommittee on Oversight and Investigations

cc:
The Honorable John D. Dingell, Ranking Member
The Honorable Peter Deutsch, Ranking Member Subcommittee on Oversight and Investigations

January 14, 2002

Joseph F. Berardino
Managing Partner and Chief Executive Officer
Andersen LLP
33 W. Monroe Street
Chicago, Illinois 60603

Dear Mr. Berardino:

As you know, the Committee on Energy and Commerce is investigating matters relating to the financial collapse of the Enron Corporation (“Enron”). As part of this investigation, the Committee requested and received thousands of pages of documents from Enron, its auditing firm Andersen, and other individuals involved with Enron. During the course of reviewing these documents, Committee investigators uncovered an Enron document that raises troubling questions about the extent to which senior officials at Enron and Andersen were aware of the controversial financial transactions and accounting practices that would ultimately contribute significantly to Enron’s demise. The Committee’s investigation also uncovered that Enron requested and received a legal review of such matters dated October 15, 2001 -- one day before Enron announced its third quarter earnings and the $1.2 billion reduction in shareholder equity due to losses later associated with various partnerships involving Enron officials.

Specifically, in August 2001, a knowledgeable Enron employee wrote a letter to Kenneth Lay, Enron’s chairman and chief executive officer, questioning the propriety of Enron’s accounting treatment of certain “related party” transactions and deconsolidated “special purpose entities.” In that letter, the employee identified several areas of concern, including the ownership interest of Andrew Fastow, Enron’s then-current Chief Financial Officer, in the LJM partnership, Enron and Andersen’s accounting treatment of Enron’s Condor, Raptor, and Whitewing entities, the adequacy of the public disclosure of these entities, and the potential impact on Enron’s financial statements due to the decline of Enron’s stock and the merchant investments placed in these entities.

The employee described a “veil of secrecy around LJM and Raptor,” and noted that several senior Enron employees “consistently and constantly” questioned the corporation’s accounting methods to senior Enron officials, and directly to Jeffrey Skilling - Enron’s former Chief Executive Officer - regarding the LJM transactions. More specifically, the employee told Mr. Lay:

We recognized over $500 million of fair value gains on stocks via our swaps with Raptor, much of that stock has declined significantly – Avici by 98%, from $178 mm to $5 mm, The New Power Co by 70%, from $20/share to $6/share. The value in the swaps won’t be there for Raptor, so once again Enron will issue stock to offset these losses. Raptor is an LJM entity. It sure looks to the layman on the street that we are hiding losses in a related company and will compensate that company with Enron stock in the future.

I am incredibly nervous that we will implode in a wave of accounting scandals. . .

Is there a way our accounting guru’s can unwind these deals now? I have thought about how to do this, but I keep bumping into one big problem – we booked the Condor deals in 1999 and 2000, we enjoyed a wonderfully high stock price, many executives sold stock, we then try to reverse or fix the deals in 2001 and it’s a bit like robbing the bank in one year and trying to pay back 2 years later. Nice try, but investors were hurt, they bought at $70 and $80 dollars looking for $210/share and now they’re at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled “redeployed” employees who know enough about the ‘funny’ accounting to get us in trouble.

(Emphases added.)

The letter to Mr. Lay recommended that Enron conduct investigations by an independent law firm and by an independent accounting firm for the purpose of analyzing transactions in detail and opining as to the propriety of the accounting treatment employed by Enron and Andersen. The Committee understands that the employee subsequently met with Mr. Lay for one hour to discuss her concerns, and that she provided supplementary documentation to support her claims. The Committee also understands that senior Enron officials instructed Vinson & Elkins L.L.P. (“Vinson & Elkins”) to conduct a general review of the letter’s allegations to determine if they “raised new factual information that would warrant a broader investigation,” but that Enron specifically told Vincent & Elkins not to “second guess[ ] the accounting advice and treatment provided by” Andersen, nor to engage in a “detailed analysis” of the particular transactions at issue. As part of that limited review, Vinson & Elkins interviewed several then-current Enron and Andersen employees, including Fastow and David Duncan, Andersen’s Partner-in-Charge of the Enron account.

The Vinson & Elkins review concluded that the concerns expressed by the Enron employee did not warrant a “further widespread investigation by independent counsel and auditors,” given that they raised no facts that had not either been known or disclosed by company officials and auditors. The Vinson & Elkins report, however, did express concern that, “because of bad cosmetics involving the LJM entities and Raptor transactions, coupled with poor performance of the merchant investment assets placed in those vehicles and the decline in the value of Enron stock, there is a serious risk of adverse publicity and litigation.” As noted in the Vinson & Elkins letter to Enron, their review and conclusions were reported directly to Mr. Lay, the entire Audit Committee of Enron’s Board of Directors, and Enron’s General Counsel.

In order for the Committee to gain a more complete understanding of the events surrounding this particular matter, we are requesting that, pursuant to Rules X and XI of the U.S. House of Representatives, Andersen produce to the Committee the following information by January 28, 2002:

1.All records relating to any investigation or review of the allegations raised by the Enron employee in August 2001, including but not limited to the review done by Vinson & Elkins at Enron’s request and any internal Andersen or Enron review.
2.The names of all Andersen employees who were interviewed, participated in, or from whom any information was requested, as part of any investigation or review referenced in Request No. 1.

Please note that, for the purpose of responding to these requests, the term "Enron," as used above, means Enron Corp., or one or more of its divisions, subsidiaries or affiliates, or related entities. The terms "records" and "relating" should be interpreted in accordance with the attachment to this letter. If you have any questions, please contact Mr. Mark Paoletta, Chief Counsel for Oversight and Investigations, at (202) 225-2927.

Thank you for your prompt attention to these matters. We appreciate your continuing cooperation with our investigation.

Sincerely,

W.J. “Billy” Tauzin
Chairman
James C. Greenwood
Chairman, Subcommittee on Oversight and Investigations

cc: The Honorable John D. Dingell, Ranking Member
The Honorable Peter Deutsch, Ranking Member Subcommittee on Oversight and Investigations

January 14, 2002

Joseph C. Dilg, Esquire
Managing Partner
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760

Dear Mr. Dilg:

As you may know, the Committee on Energy and Commerce is investigating matters relating to the financial collapse of the Enron Corporation (“Enron”). As part of this investigation, the Committee requested and received thousands of pages of documents from Enron, its auditing firm Andersen, and other individuals involved with Enron. During the course of reviewing these documents, Committee investigators uncovered an Enron document that raises troubling questions about the extent to which senior officials at Enron and Andersen were aware of the controversial financial transactions and accounting practices that would ultimately contribute significantly to Enron’s demise. The Committee’s investigation also uncovered that Enron requested and received a legal review of such matters dated October 15, 2001 -- one day before Enron announced its third quarter earnings and the $1.2 billion reduction in shareholder equity due to losses later associated with various partnerships involving Enron officials.

Specifically, in August 2001, a knowledgeable Enron employee wrote a letter to Kenneth Lay, Enron’s chairman and chief executive officer, questioning the propriety of Enron’s accounting treatment of certain “related party” transactions and deconsolidated “special purpose entities.” In that letter, the employee identified several areas of concern, including the ownership interest of Andrew Fastow, Enron’s then-current Chief Financial Officer, in the LJM partnership, Enron and Andersen’s accounting treatment of Enron’s Condor, Raptor, and Whitewing entities, the adequacy of the public disclosure of these entities, and the potential impact on Enron’s financial statements due to the decline of Enron’s stock and the merchant investments placed in these entities.

The employee described a “veil of secrecy around LJM and Raptor,” and noted that several senior Enron employees “consistently and constantly” questioned the corporation’s accounting methods to senior Enron officials, and directly to Jeffrey Skilling - Enron’s former Chief Executive Office - regarding the LJM transactions. More specifically, the employee told Mr. Lay: We recognized over $500 million of fair value gains on stocks via our swaps with Raptor, much of that stock has declined significantly – Avici by 98%, from $178 mm to $5 mm, The New Power Co by 70%, from $20/share to $6/share. The value in the swaps won’t be there for Raptor, so once again Enron will issue stock to offset these losses. Raptor is an LJM entity. It sure looks to the layman on the street that we are hiding losses in a related company and will compensate that company with Enron stock in the future.

I am incredibly nervous that we will implode in a wave of accounting scandals. . .

Is there a way our accounting guru’s can unwind these deals now? I have thought about how to do this, but I keep bumping into one big problem – we booked the Condor deals in 1999 and 2000, we enjoyed a wonderfully high stock price, many executives sold stock, we then try to reverse or fix the deals in 2001 and it’s a bit like robbing the bank in one year and trying to pay back 2 years later. Nice try, but investors were hurt, they bought at $70 and $80 dollars looking for $210/share and now they’re at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled “redeployed” employees who know enough about the ‘funny’ accounting to get us in trouble.

(Emphases added.)

The letter to Mr. Lay recommended that Enron conduct investigations by an independent law firm and by an independent accounting firm for the purpose of analyzing transactions in detail and opining as to the propriety of the accounting treatment employed by Enron and Andersen. The Committee understands that the employee subsequently met with Mr. Lay for one hour to discuss her concerns, and that she provided supplementary documentation to support her claims. The Committee also understands that senior Enron officials instructed your firm to conduct a general review of the letter’s allegations to determine if they “raised new factual information that would warrant a broader investigation,” but that Enron specifically told Vincent & Elkins not to “second guess[ ] the accounting advice and treatment provided by” Andersen, nor to engage in a “detailed analysis” of the particular transactions at issue. As part of that limited review, Vinson & Elkins interviewed several then-current Enron and Andersen employees, including Fastow and David Duncan, Andersen’s Partner-in-Charge of the Enron account.

The Vinson & Elkins review concluded that the concerns expressed by the Enron employee did not warrant a “further widespread investigation by independent counsel and auditors,” given that they raised no facts that had not either been known or disclosed by company officials and auditors. Your firm’s report, however, did express concern that, “because of bad cosmetics involving the LJM entities and Raptor transactions, coupled with poor performance of the merchant investment assets placed in those vehicles and the decline in the value of Enron stock, there is a serious risk of adverse publicity and litigation.” As noted in the Vinson & Elkins letter to Enron, your review and conclusions were reported directly to Mr. Lay, the entire Audit Committee of Enron’s Board of Directors, and Enron’s General Counsel.

In order for the Committee to gain a more complete understanding of the events surrounding this particular matter, we are requesting that, pursuant to Rules X and XI of the U.S. House of Representatives, Vinson & Elkins produce to the Committee the following information by January 28, 2002:

1.All records relating to any investigation or review of the allegations raised by the Enron employee in August 2001, including but not limited to the review done by Vinson & Elkins at Enron’s request and any internal Andersen or Enron review.
2.The names of all Enron and Andersen employees, or any other individuals, who were interviewed, or from whom any information was requested, as part of any investigation or review referenced in Request No. 1.
3.The names of all Vinson & Elkins employees who participated in the Vinson & Elkins review dated October 15, 2001.

Please note that, for the purpose of responding to these requests, the term "Enron," as used above, means Enron Corp., or one or more of its divisions, subsidiaries or affiliates, or related entities. The terms "records" and "relating" should be interpreted in accordance with the attachment to this letter. If you have any questions, please contact Mr. Mark Paoletta, Chief Counsel for Oversight and Investigations, at (202) 225-2927.

Thank you for your prompt attention to these matters. We appreciate your continuing cooperation with our investigation.

Sincerely,

W.J. “Billy” Tauzin
Chairman

James C. Greenwood Chairman, Subcommittee on Oversight and Investigations

cc: The Honorable John D. Dingell, Ranking Member
The Honorable Peter Deutsch, Ranking Member Subcommittee on Oversight and Investigations

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