A Senate investigations panel said Tuesday that Enron’s board of directors treated its top executives with great deference and watched passively as the firm engaged in financial shenanigans that put the firm at grave risk.
Not only did the board fail to act aggressively enough to deal with conflicts of interest by executives running Enron’s notorious partnerships, the panel said, but many members had their own financial conflicts that might have made them reluctant to confront management.
Five of the board members appeared before the Senate Permanent Investigations Subcommittee to defend their role in the company’s collapse, saying that they would have acted more quickly and forcefully had they been told the truth about the firm’s financial condition.
“We didn’t know the facts,” said Norman Blake Jr., a current board member and interim chairman of the company, now in bankruptcy. He and others said that assessing blame may be difficult to do until the full story is told, probably in a court of law.
But Sen. Carl Levin (D-Mich.), chairman of the panel, cited a number of red flags indicating that the board should have known about the risks posed by the partnerships and should have demanded more answers from top management about them. “I am absolutely amazed at your denial of responsibility for anything that happened at Enron,” Levin told the directors.
Added Sen. Joseph Lieberman (D-Conn.), chairman of the Governmental Affairs Committee: “A stunning 10 of the 15 most recent outside directors had conflicts of interest, including contracts with Enron, common bonds to charities, and memberships on the boards of other companies doing business with Enron.”
Since Enron’s collapse last December, Congress has focused on the role of boards of directors in protecting shareholders. Lieberman said he favors giving the Securities and Exchange Commission power to remove negligent directors. He would also limit their terms by law and ban company stock sales while they serve.
The five board members said they thought they did a good job considering that so much information was withheld. “We cannot, I submit, be criticized for failing to address or remedy problems that were concealed from us,” said Herbert Winokur, a director and chairman of the firm’s finance committee.
Enron board members said they were not aware Enron engaged in trading practices that artificially drove up electricity prices in California in 2000, as disclosed in a document released Monday. “Not once did we hear anything that suggested any improprieties in California,” said Winokur.
Asked about the California revelations, President Bush’s spokesman, Ari Fleischer, said Bush “expects the investigation will be vigorously pursued wherever it may go.” A memorandum written by Enron lawyers in December 2000 alleged Enron created phantom congestion on electricity transmission lines and engaged in sham sales among affiliates.
Red flags cited
Levin told the board members he didn’t buy their explanation that they didn’t know enough about the company’s problems to cause them to raise greater protests. He cited as a red flag a Feb. 7, 1999, memo to Enron’s audit committee by David Duncan, the Arthur Andersen auditor who handled the Enron account.
The memo raised questions about complex transactions in the firm’s partnerships which the company used to hide its debt and increase its cash flow. Duncan wrote: “Obviously we are on board with all of these, but many push limits and have a high … risk profile.”
Levin chided Charles LeMaistre, who formerly headed Enron’s compensation committee, for not being aggressive enough when he had concerns that Andrew Fastow, the firm’s chief financial officer who was put in charge of two controversial partnerships known as LJM1 and LJM2, had profited handsomely from them. The board had waived conflict-of-interest regulations to permit Fastow to run the partnerships.
Avoided confrontations
After newspaper reports that Fastow had received at least $30 million from the partnerships, LeMaistre did not confront him and demand an explanation, Levin said. Instead, in a memo to Fastow drafted by an Enron lawyer, he said, “We very much appreciate your willingness to visit with us.”
“You can’t get much more deferential and obsequious than that,” Levin said.
LeMaistre said he was angry when he learned how much Fastow had earned on the partnerships.
While the board was under the impression that internal controls would prevent Fastow from enriching himself, a private placement memorandum that LJM2 sent out to attract investors trumpeted the fact that Enron executives managed it. Levin said this should have been a warning. “The conflict of interest was being sold as a plus,” he said.
