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Committee News The House Committee on Energy and Commerce |
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Energy and Commerce Committee Wants Skilling
To Clarify Congressional Testimony Washington
(February 28) - As
part of their continuing investigation into the financial collapse of Enron
Corporation, House Energy and Commerce Committee Chairman Billy Tauzin (R-LA),
along with Ranking Member John Dingell (D-MI), Oversight and Investigations
Subcommittee Chairman James Greenwood (R-PA) and Subcommittee Ranking Member
Peter Deutsch (D-FL), today called on former Enron CEO Jeffrey Skilling to
clarify remarks delivered in recent weeks during sworn testimony before
Congress. pressofficerules (Attached
below is a copy of the letter sent today to former Enron CEO Skilling) c/o
Bruce A. Hiler, Esq. O'Melveny
& Myers, LLP 555
13th Street, N.W.
Suite
500 West Washington,
D.C. 20004-1109 Dear
Mr. Skilling: As
you know, the Committee on Energy and Commerce is investigating matters
related to the collapse of the Enron Corporation (Enron).
We are writing to follow up on testimony that you gave to the
Subcommittee on Oversight and Investigations on February 7, 2002.
Specifically, documents recently obtained by Committee investigators
appear to raise serious questions about the accuracy of your testimony with
respect to your involvement in the Raptor transactions. During
2000 and 2001, Enron engaged in hedging transactions with special purpose
entities (SPEs) known as the Raptors. Raptors
I, II and IV were capitalized in a series of transactions that were
substantially identical. Specifically,
Enron would capitalize the SPE with its own stock (or contingent or forward
contracts on its own stock) in return for a note receivable from the SPE, and
LJM2 - a partnership run by then-Enron Chief Financial Officer Andrew Fastow -
would contribute at least 3% of the SPE's capitalization (roughly $30 million)
in order to ensure non-consolidation of the SPE on Enron's books The SPEs
would then enter into an initial "put" arrangement with Enron,
whereby Enron would pay the SPE roughly $40 million to take a short-term risk
of a significant decline in the value of several million shares of Enron's own
stock, which in each case was promptly terminated favorably to the SPE.
The SPE, in accordance with its agreements with LJM2, then distributed
the $40 million in alleged "earnings" on the put back to LJM2, thus
effectively guaranteeing that LJM2 got back its initial equity investment plus
a substantial return on that investment in a matter of several months.
Once these "earnings" were distributed, the SPE would then
enter into hedging transactions with Enron, whereby the SPE would agree to
buy, or provide cash equal to the decline in market value of, certain
Enron assets (usually equity investments in volatile stocks such as Avici). As
a result of this structure, Enron was, in essence, entering into hedges with
entities whose only remaining assets had been contributed to them by Enron,
and whose ability to make good on their liabilities to Enron was dependent on
the value of Enron's own stock. The
purpose of these transactions, as you yourself have admitted, was to provide
protection to Enron's profit and loss statements in the event of a decline in
the value of the hedged assets. By
the end of 2000, however, many of the hedged assets had deteriorated
significantly, thus placing significant liabilities on some of the SPEs that
their assets - namely Enron stock - were not sufficient to cover.
At the same time, Enron was reducing the value of those assets on its
books, but also recognizing gains from the hedges with the SPEs in an equal
amount - effectively neutralizing or negating the impact of the assets'
declines on its books. This
strategy would work only so long as Enron could continue to count on the SPEs
to make good on their liabilities to Enron.
But the deteriorating financial condition of the SPEs ultimately would
force Enron to discount the receivables from the SPEs, which in turn would
result in Enron having to acknowledge these losses, or some portion of these
losses, in its hedged assets. To
avoid the impairment of the Raptors' creditworthiness, in December 2000, Enron
and Andersen, its auditor, agreed to a questionable and temporary 45-day
"cross collateralization" of the four Raptor vehicles.
This maneuver allowed the positive equity in two of the Raptors could
offset the negative equity in the other two Raptors.
But by March 2001, the financial condition of the Raptors had continued
to worsen, to the point that it appeared that Enron would have to take a
pre-tax charge against earnings of more than $500 million to reflect the
reserves necessary to offset the credit capacity shortfall of two of the
Raptor vehicles. To avoid
recording a reserve against the credit capacity shortfall, Enron again
restructured the Raptors by pumping hundreds of million of dollars of Enron
stock or stock contracts into the Raptors, while also making other financial
concessions to the Raptors. In
return, Enron simply got back another note receivable from the Raptors.
Ultimately,
the restructuring failed due to the continuing deterioration of both the
hedged assets and the value of Enron's own stocks (which were the SPEs'
principal assets upon which to make good on the note receivables and the
hedges). Enron then terminated
the vehicles in September 2001, resulting in a pre-tax charge to income of
more than $700 million. On the
same day that Enron disclosed this charge -- October 16, 2001 -- Enron also
reported that it had overstated shareholder equity by $1.2 billion because of
"accounting errors" related to the recording of notes receivable
from the Raptor vehicles. According
to the Powers Report commissioned by a special committee of the Enron Board of
Directors, if the accounts of other Enron employees are accurate, you approved
a restructuring of the Raptor transactions that was designed to conceal losses
from Enron's investments, and one that was not submitted to the Board of
Directors for its approval.
During
your testimony before the Subcommittee on February 7th, you stated
that, upon leaving Enron in August 2001, you believed the company was in
strong financial condition and did not have any serious financial problems.
Specifically, you testified that "the financial statements issued
by Enron, as far as I knew, accurately reflected the financial condition of
the company." You also
stated that "on the day I left I absolutely, unequivocally thought the
company was in good shape." In
response to the specific charges of the Powers Report with respect to the
Raptors, you testified: "I can state here today that I did not have any
knowledge that the transaction was designed to conceal losses, and I did not
do anything to withhold information from the Board of Directors of Enron
Corporation." Later in your
testimony, you also stated that you could not recollect being involved in
approving the Raptor restructuring. However,
documents obtained by the Committee suggest otherwise.
In
an interview of Ryan Siurek, Senior Director, Transaction Support at Enron, by
the Powers Committee on January 31, 2002 (written summary attached), Siurek
recalled the following: Siurek
was helping Causey prepare to present Skilling with the alternatives so that
Skilling could make decisions regarding the restructuring.
It was Siurek's understanding that Skilling was the ultimate
decision-maker concerning the restructuring.
On at least one occasion, Causey's assistant interrupted Siurek's
meeting with Causey to tell Causey that Skilling was ready to meet with
him.... Causey
said that Skilling approved of the restructuring transaction.
Siurek has no doubts that Skilling knew about the Raptor's credit
capacity problems and about the restructuring.
Ben Glisan told Siurek that he had spoken with Skilling about the
Raptors credit capacity problems during the first quarter of 2001....Siurek is
certain that Causey spoke to Skilling about the credit capacity problem. Mr.
Siurek also stated that you called him on the day the restructuring closed and
congratulated him on the restructuring, making comments that "gave Siurek
the impression that Skilling knew the financial aspects of the
transaction." Rodney
Faldyn, Siurek's supervisor and Enron's Vice President of Financial
Accounting, provided the Powers Committee with an account consistent with Mr.
Siurek's. According to a summary
of Mr. Faldyn's interview on January 9, 2002 (copy attached), "Causey
told Faldyn that Skilling was aware of the credit deficiency issue"
involving the Raptors, and Causey also had told him that "Skilling said
the restructuring was a top priority and that Causey and his team should be
focused on the restructuring." In
an interview of Richard Causey, former Chief Accounting Officer of Enron, by
the Powers Committee on January 17, 2002, Mr. Causey confirmed the accounts of
Faldyn and Siurek, his employees. (See interview summary attached.)
Causey stated that he was certain he had told you about the shortfall
in the Raptor vehicles, and had made you aware that he was working to find a
solution. He said he had updated
you during development of the restructuring plan, after determining the
solution to the credit capacity problem, and before executing the Raptor
restructuring plan. He stated
that he obtained your approval on the restructuring plan that was adopted.
Given
the financial significance of the Raptor transactions to Enron's balance sheet
during this time period, and the probability of Enron having to take large
charges to its earnings because of the Raptors' deteriorating financial
conditions, the recollections of these Enron employees with respect to your
personal involvement seem highly credible. Accordingly, your testimony
regarding your lack of involvement appears less so.
In light of these accounts by your subordinates, which may serve to
refresh your recollection of these important events, We are requesting that
you supplement your testimony by personally responding to the following
questions for the hearing record by no later than March 7, 2002: 1)
Mr. Causey states that he advised you of the Raptor credit capacity
problems and his search for potential solutions, and that he obtained your
approval for the final restructuring plan.
Did you participate in any of these conversations with Mr. Causey, and
did you, in fact, approve or give any positive response to the proposed Raptor
restructuring? If so,
please describe these events to the best of your recollection. If
you do not recall such conversations with Mr. Causey, do you have any reason
or basis upon which to
dispute Mr. Causey's statements? 2)
Did you call Mr. Siurek following the closing of the Raptor
restructuring? If so, please
describe your call him and the substance of your conversation with him.
If
you do not recall whether you called Mr. Siurek, do you have any reason or
basis upon which to dispute his
recollection of events? 3)
Mr. Siurek also stated that Mr. Ben Glisan, Enron's treasurer told him
that he (Glisan) had spoken with you in the first quarter of 2001 about the
Raptor's credit capacity problems. Did
you have such a conversation with Mr. Glisan?
If so, please describe the substance of that conversation to the best
of your recollection. If
you do not recall whether you spoke with Mr. Glisan as described above, do you
have any reason or basis upon
which to dispute Mr. Siurek's account? 4)
In light of Mr. Faldyn's statements to the Powers Committee, do you now
recall telling Mr. Causey that the Raptors restructuring was a top priority
and/or that his team should be focused on the restructuring?
If so, please describe the substance of that communication to the best
of your recollection. If
you do not recall whether you made such statements to Mr. Causey, do you have
any reason or basis upon which to
dispute Mr. Faldyn's account? 5)
Were you aware in the first quarter of 2001 that the restructuring of
the Raptors in March 2001 would permit Enron to avoid taking a pre-tax charge
in the hundreds of millions of dollars in that quarter?
If so, please describe your understanding of this matter.
Was
the purpose of the restructuring of the Raptors to avoid an impairment of the
Raptor notes and the ability of Enron to collect on its gains on its hedges
with the Raptors? If not, or you
do not recall, please describe your understanding of the business purpose of
the restructuring. 6)
At the Subcommittee's hearing, you were asked about whether you knew
that the hedges made with the Raptors were in trouble as of March 2001 and
that, to avoid taking a $500 million charge against earnings at that time,
Enron contributed another $800 million in Enron stock to the Raptors.
Your response, however, was that you had not heard of the $500 million
number at that time, and you continued by saying: "I had asked, What is
the status of our hedges? Are our
hedges all right? And I was
assured that our hedges were correct. So
to the best of my knowledge, it was not an issue." Your
response appears to indicate that you were not advised of any problems with
the Raptor hedges or potential charges against Enron's earnings in the first
quarter of 2001, and that, to the contrary, you were told the hedges were
"correct." Please
explain the meaning of a "correct" hedge;
whether you were ever advised of any credit capacity deficiency
impacting the Raptor hedges or Enron's balance sheet (and indicate the amount
of such deficiency); and whether you knew that Enron was contributing or
"selling" additional Enron stock (or forward contracts on Enron
stock) to the Raptor entities at that time to shore up their credit capacity
(and in what amounts those contributions were made). 7)
In your testimony, you stated, in response to a question about whether
there was any agreement between you or Enron and LJM that would protect LJM
from losses on any of its transactions, that you "absolutely,
unequivocally deny that there was any arrangement, any agreement, period, that
would have provided a riskless rate of return to anyone that we dealt with as
Enron Corporation." Later in
your testimony, you further stated: "I had no handshake agreement with
Mr. Fastow that would guarantee him a rate of return on his investment."
And further into your testimony, you repeated this refrain, saying:
"Andrew Fastow and I had absolutely no understanding of any sort, any
nature, that suggested the partnership would be guaranteed a rate of
return." Your
responses - all of which focused on rates of return - did not specifically
answer the questions posed to you at the hearing, which were whether there
were any agreements or understandings, written or otherwise, that would
protect the LJM partnership or Mr. Fastow from the loss of their investments
in the Enron SPEs such as the Raptors, or losses in the specific hedging
transactions entered into between Enron, the LJM partnerships or the SPEs.
Please state whether you are aware of any such agreements or
understandings that would reduce or eliminate the risk of loss of all or a
portion of the equity invested into the SPEs by Mr. Fastow and/or the LJM
partnerships, or the risk of such loss on specific transactions entered into
by the LJM partnerships or the SPEs. If
you have any questions, please contact Mark Paoletta, Chief Counsel for
Oversight and Investigations, at (202) 225-2927, or Edith Holleman, minority
counsel, at (202) 226-3400. Thank
you for your prompt attention to these matters. Sincerely, W.J.
"Billy" Tauzin Chairman John
D. Dingell Ranking
Member James
C. Greenwood
Peter
Deutsch Ranking
Member, Subcommittee on Oversight and Investigations (For
copies of the documents referenced in today's letter to former Enron CEO
Jeffrey Skilling, visit: (http://test.archives.republicans.energycommerce.house.gov/107/pubs/skillingdocuments.pdf) ####
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