THE ROLE OF THE BOARD OF DIRECTORS IN ENRON’S · PDF file(II) COMMITTEE ON ... MARK DAYTON, Minnesota ... encourage company personnel to use improper ac-The Role of the Board of

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80393 PDF
COMMITTEE PRINT" !107th Congress2d Session S. PRT.
2002
10770
THE ROLE OF THE BOARD OF DIRECTORSIN ENRONS COLLAPSE
R E P O R T
PREPARED BY THE
PERMANENT SUBCOMMITTEE ONINVESTIGATIONS
OF THE
COMMITTEE ON GOVERNMENTAL AFFAIRSUNITED STATES SENATE
JULY 8, 2002
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COMMITTEE ON GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, ChairmanCARL LEVIN, MichiganDANIEL K. AKAKA, HawaiiRICHARD J. DURBIN, IllinoisROBERT G. TORRICELLI, New JerseyMAX CLELAND, GeorgiaTHOMAS R. CARPER, DelawareJEAN CARNAHAN, MissouriMARK DAYTON, Minnesota
FRED THOMPSON, TennesseeTED STEVENS, AlaskaSUSAN M. COLLINS, MaineGEORGE V. VOINOVICH, OhioTHAD COCHRAN, MississippiROBERT F. BENNETT, UtahJIM BUNNING, KentuckyPETER G. FITZGERALD, Illinois
JOYCE A. RECHTSCHAFFEN, Staff Director and CounselRICHARD A. HERTLING, Minority Staff Director
DARLA D. CASSELL, Chief Clerk
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
CARL LEVIN, Michigan, ChairmanDANIEL K. AKAKA, HawaiiRICHARD J. DURBIN, IllinoisROBERT G. TORRICELLI, New JerseyMAX CLELAND, GeorgiaTHOMAS R. CARPER, DelawareJEAN CARNAHAN, MissouriMARK DAYTON, Minnesota
SUSAN M. COLLINS, MaineTED STEVENS, AlaskaGEORGE V. VOINOVICH, OhioTHAD COCHRAN, MississippiROBERT F. BENNETT, UtahJIM BUNNING, KentuckyPETER G. FITZGERALD, Illinois
ELISE J. BEAN, Acting Staff Director and Chief CounselKIM CORTHELL, Minority Staff Director
MARY D. ROBERTSON, Chief Clerk

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C O N T E N T S
Page
SUBCOMMITTEE INVESTIGATION ............................................................... 1SUBCOMMITTEE FINDINGS ............................................................................ 2
(1) Fiduciary Failure ........................................................................................ 3(2) High Risk Accounting ................................................................................. 3(3) Inappropriate Conflicts of Interest ............................................................ 3(4) Extensive Undisclosed Off-The-Books Activity ......................................... 3(5) Excessive Compensation ............................................................................. 3(6) Lack of Independence ................................................................................. 3
SUBCOMMITTEE RECOMMENDATIONS ..................................................... 4(1) Strengthening Oversight ............................................................................ 4(2) Strengthening Independence ..................................................................... 4
BACKGROUND ..................................................................................................... 5Fiduciary Obligations of Boards of Directors ................................................. 5Enron Corporation ............................................................................................ 6Enron Board ...................................................................................................... 8
FACTUAL BASIS FOR FINDINGS ................................................................... 11Finding (1) Fiduciary Failure .......................................................................... 11Finding (2) High Risk Accounting ................................................................... 14
Andersen Briefings on High Risk Areas ................................................... 15Other Evidence of Board Awareness of Enrons High Risk Accounting . 20
Finding (3) Inappropriate Conflicts of Interest .............................................. 23Board Approval of LJM With Few Questions Asked ............................... 24Flawed Controls to Mitigate LJM Conflicts .............................................. 27Inadequate Board Oversight of LJM Transactions With Enron ............. 29Inadequate Board Oversight of Fastows LJM Compensation ................ 32LJM Profits at the Expense of Enron ....................................................... 34
Finding (4) Extensive Undisclosed Off-The-Books Activity .......................... 36Whitewing .................................................................................................... 36LJM Partnerships ....................................................................................... 39The Raptors ................................................................................................. 40Inadequate Public Disclosure ..................................................................... 47
Finding (5) Excessive Compensation .............................................................. 48Finding (6) Lack of Independence ................................................................... 51
Board Independence ................................................................................... 51Auditor Independence ................................................................................. 53
CONCLUSION ....................................................................................................... 55Appendix 1: Red Flags Know to Enrons Board .................................................. 56Appendix 2: Sherron Watkins Letter to Board Chairman Kenneth Lay (8/
15/01) ..................................................................................................................... 57

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THE ROLE OF THE BOARD OFDIRECTORS IN ENRONS COLLAPSE
SUBCOMMITTEE INVESTIGATION
On December 2, 2001, Enron Corporation, then the seventh larg-est publicly traded corporation in the United States, declared bank-ruptcy. That bankruptcy sent shock waves throughout the country,on both Wall Street and Main Street where over half of Americanfamilies now invest directly or indirectly in the stock market. Thou-sands of Enron employees lost not only their jobs but a significantpart of their retirement savings; Enron shareholders saw the valueof their investments plummet; and hundreds, if not thousands ofbusinesses around the world, were turned into Enron creditors inbankruptcy court likely to receive only pennies on the dollars owedto them.
On January 2, 2002, Senator Carl Levin, Chairman of thePermanent Subcommittee on Investigations, and Senator Susan M.Collins, the Ranking Minority Member, announced that the Sub-committee would conduct an in-depth investigation into the col-lapse of the Enron Corporation. The following month the Sub-committee issued over 50 subpoenas to Enron Board members,Enron officers, the Enron Corporation, and the Andersen account-ing firm. Over the next few months, additional subpoenas anddocument requests were directed to other accounting firms and fi-nancial institutions. By May 2002, the Subcommittee staff had re-viewed over 350 boxes of documents, including the available meet-ing minutes, presentations, and attachments for the full Board andits Finance and Audit Committees. The Subcommittee staff alsospoke with representatives of Enron Corporation and Andersen, aswell as numerous financial institutions and experts in corporategovernance and accounting.
During April 2002, the Subcommittee staff interviewed 13 pastand present Enron Board members, none of whom had previouslybeen interviewed by the U.S. Department of Justice, Federal Bu-reau of Investigation, or the Securities and Exchange Commission.These lengthy interviews, lasting between 3 and 8 hours, were con-ducted with the following Enron Board members: Robert A. Belfer,Norman P. Blake, Jr., Ronnie C. Chan, John H. Duncan, Dr.Wendy L. Gramm, Dr. Robert K. Jaedicke, Dr. Charles A. Le-Maistre, Dr. John Mendelsohn, Paulo Ferraz Pereira, Frank Sav-age, Lord John Wakeham, Charls Walker, and Herbert S. Winokur,Jr. All Board members appeared voluntarily, and all were rep-resented by the same legal counsel.

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1 Two Enron Directors, Mr. Blake and Mr. Winokur, who were members of the Board at thetime of the May 7 hearing, resigned from the Enron Board on June 6, 2002.
On May 7, 2002, the Subcommittee held a hearing on the roleand responsibility of the Enron Board of Directors to safeguardshareholder interests and on its role in Enrons collapse and bank-ruptcy. Two panels of witnesses testified under oath. The firstpanel consisted of five past and present Enron Board members, in-cluding the current Board Chairman and the past Chairmen of thekey Board Committees. The witnesses were as follows:
Norman P. Blake, Jr. (19942002), Interim Chairman ofthe Enron Board and former member of the Enron Financeand Compensation Committees, has extensive corporate,Board, and investment experience, including past serviceon the Board of General Electric, and current service asAudit Committee Chairman of the Board of Owens Cor-ning;John H. Duncan (19852001), former Chairman of theEnron Executive Committee, has extensive corporate an