Bush's Energy Plan Bares Industry Clout
Enron's Influence Reached Deep Into Administration
Bush's Energy Plan Bares Industry Clout LOWER LINK Bush's Energy Plan Bares Industry Clout
Cheney-led task force consulted extensively with corporate executives. Its findings boosted their interests. Environmental groups had little voice.
By JUDY PASTERNAK, Times Staff Writer
WASHINGTON -- Throughout February and March, executives representing electricity, coal, natural gas and nuclear interests paraded quietly in small groups to a building in the White House compound, where the new administration's energy policy was being written.
Some firms sent emissaries more than once. Enron Corp., which trades electricity and natural gas, once got three top officials into a private session with Vice President Dick Cheney, who headed the energy task force. Cheney did "a lot of listening," according to a company spokesman.
Many of the executives at the White House meetings were generous donors to the Republican Party, and some of their key lobbyists were freshly hired from the Bush presidential campaign. They found a receptive task force. Among its ranks were three former energy industry executives and consultants. The task force also included a Bush agency head who was involved in the sensitive discussions while his wife took in thousands of dollars in fees from three electricity producers.
The final report, issued May 16, boosted the nation's energy industries. It called for additional coal production, and five days later the world's largest coal company, Peabody Energy, issued a public stock offering, raising about $60 million more than expected. While Peabody was preparing to go public, its chief executive and vice president participated in a March 1 meeting with Cheney.
The report also touted new gas extraction technologies. An early draft noted controversy over a gas recovery technique offered by Halliburton Co., the firm Cheney ran from 1995 to 2000, before becoming vice president. The plan released to the public deleted the negative language.
Cheney continues to resist demands by Congress to disclose who met with administration officials during the 106 days earlier this year when the energy plan was fashioned. The private nature of the work fostered candid and creative discussions "from new and unused quarters," said Cheney Press Secretary Juleanna Glover Weiss.
But interviews and a review of task force documents show how the administration relied on familiar faces who stood to benefit from the process.
Just once, the task force departed from its pledge to keep secret the names of people invited to pitch their opinions face to face. After producers of power from the sun, wind and geothermal heat met with Cheney, officials led the group to the front of the White House and waiting reporters.
The date was May 15, just one day before the plan was sent to President Bush.
Others whose views might conflict with industry--the Union of Concerned Scientists, the Sierra Club, even federal agency staff--found themselves shut out or overruled.
In the sessions they held while they worked on the plan, Cheney and his staff generally heard a message reinforcing their own mind-set: Free markets, fewer pollution rules and expanded development of traditional fuels.
Using less energy and energy in different forms were notions mentioned but not emphasized. "What do you expect?" asked one energy industry insider whose colleagues met with Cheney. "These people make their living from coal and natural gas and nuclear power. Do you think they're going to push for solar and wind?"
The influences are evident in the final product.
The report focuses on easing regulation for oil and gas drilling, coal-fired generators, nuclear power plants and transmission of electricity, while providing energy assistance to poor households. Though the plan also backs alternative fuels and conservation, it gives the most support to increasing the supply of traditional sources of energy.
One passage adopts word for word a proposal on global warming from the U.S. Energy Assn.'s National Energy Strategy, which is dominated by trade groups. The section suggests encouraging other countries to build factories with clean technologies sold by U.S. companies.
Even basic assumptions in the report were tailored to industry's measure.
A briefing paper prepared for a March 19 task force meeting with Bush said that, "on the whole, U.S. energy markets are working well, allocating resources and preventing shortages." But two months later, the final task force report proclaimed that "America faces the most serious energy shortage since the oil embargoes of the 1970s."
The energy situation hadn't changed. One staffer recalls seeing a memo that discussed "utilizing" California's rolling blackouts and the past summer's high-priced gasoline to press for more drilling for gas and oil.
The task force began work in late January, nine days after Bush's inauguration.
By all accounts, the vice president dominated the meetings. Energy Secretary Spencer Abraham; Bush's chief economic advisor, Lawrence B. Lindsey; and Environmental Protection Agency Chief Christie Whitman were the others with the most to say, one administration official said. But everyone jumped in on matters outside his or her own immediate jurisdiction.
There was no shortage of private energy experience. Besides Cheney's stint as Halliburton's chief executive, Commerce Secretary Don Evans ran an oil company and Lindsey served on an Enron advisory board.
The committee still gathers on occasion, most recently last month, to monitor progress of its recommendations. The House of Representatives passed an energy measure that reflects the plan. Once the Senate votes next month and the two houses of Congress sit down to negotiate a final bill, "we'll be bringing a lot of pressure to bear," Weiss said. "Our objective is to get that legislation as close to the policy as possible."
To Howard "Bud" Ris, who heads the Union of Concerned Scientists, the process represents an opportunity lost. He disagrees with the report's conclusions but says he would have felt better if task force members and staff had thoroughly explored all sides.
"They should have done a really rigorous review. They foreclosed all kinds of options."
Electricity
If any group had the White House wired, it was the electricity industry.
The director of its major lobbying arm, the Edison Electric Institute, roomed at Yale University with George W. Bush. Electricity generators and marketers contributed $19.7 million to Republicans since 1998, roughly double what they gave Democrats, according to the Center for Responsive Politics. And electricity companies negotiated contracts with administration friends, political operatives and, in one case, a family member.
Take Haley Barbour, former chairman of the Republican National Committee. In the spring of 2000, the Bush campaign recruited him to help with strategy.
A year later, as a lobbyist for several electricity producers, he pushed Bush and Cheney to renege on a campaign promise to restrict power plant emissions of carbon dioxide. The gas has been linked to global warming.
On March 1, Barbour sent a sternly worded memo on the subject to Cheney. "A moment of truth is arriving," the note began. Complying with carbon dioxide limits would be so expensive that Bush should reverse his position, Barbour argued.
"Clinton-Gore policies meant less energy and more expensive energy," he wrote. "Most Americans thought Bush-Cheney would mean more energy, and more affordable energy."
Within weeks, Cheney's task force had adopted the same reasoning on carbon dioxide. Bush cited the task force position when he announced in March that he had changed his mind.
The National Electric Reliability Council, an industry trade group, hired former Montana Gov. Marc Racicot as a Washington representative. Racicot was a close Bush advisor during the tumultuous postelection days in Florida.
Racicot said he met with Cheney and his energy director, Andrew Lundquist, on the subject of the EPA's forcing old plants to update their clean air equipment.
The task force report suggested that the Justice Department consider dropping lawsuits it has already brought for alleged violations.
Three electricity companies employ Diane Allbaugh as a lobbyist. She is married to Joe Allbaugh, the only member of Bush's so-called iron triangle of trusted Texas cohorts to serve on the energy task force. During meetings of the panel, Joe Allbaugh always took a chair at one end of the table, with Abraham to his right and Whitman to his left. He serves by virtue of his position as director of the Federal Emergency Management Agency.
In her most recent disclosure reports in January, Diane Allbaugh said that the three firms--Reliant Energy, Entergy and TXU, paid her $20,000 apiece in the previous three months. She wrote that she did no lobbying on their behalf. The companies say she performed other consulting duties.
Reliant spokesman Richard Wheatley said the company is "actively supporting" the energy plan, but Diane Allbaugh's "minimal assignments have not involved the task force, specifically to avoid any specter or allegation that there is a conflict of interest." She is a consultant on "Texas-related" issues, he said.
Spokeswomen for TXU and Entergy said Diane Allbaugh's work for them is likewise restricted to their Texas operations.
Meanwhile, her husband, Joe Allbaugh, has participated in task force talks with a direct bearing on the energy companies' interests generally, such as environmental rules for power plants and electricity deregulation--a specialty of his wife's.
At least twice he was privy to updates from economic advisor Lindsey on California's malfunctioning market, where Reliant stands accused by the state of overcharging. The company denies any wrongdoing.
Joe Allbaugh's spokeswoman, Christi Harlan, said that nothing "about the situation would suggest that the director would need to seek ethics guidance" and added that his wife's lobbying reports "are going to have to speak for themselves."
Diane Allbaugh declined comment. Visited at the townhouse that the Allbaughs bought in March from the Cheneys, she said: "I appreciate the effort you've gone to, but I don't think we're going to talk."
In 1996, the Dallas Morning News reported that she represented clients with interests in pending Texas state deregulation of telecommunications and utilities markets, while her husband served as then-Gov. Bush's chief of staff. At the time, Bush said he was troubled "if it creates a public perception that something unfair is taking place."
At the time, she wrote the governor's counsel that she was withdrawing from her contracts. And Bush instituted a policy that division heads and senior aides could not be married to registered lobbyists, according to Texas newspapers.
As president, Bush has no special guidelines beyond those of the Office of Government Ethics, said White House spokeswoman Claire Buchan. These regulations appear less stringent, prohibiting participation only if a particular matter applying to a specific company is addressed.
TXU Chief Executive Erle Nye--a client then and now--said Diane Allbaugh has been a consultant on deregulation issues. She registered as a lobbyist, he said, just in case she happened to talk about a pertinent issue to a politician. "To my knowledge, we would not have let her lobby," he explained, "because she is the wife of Joe."
Natural Gas
Natural gas was connected in high places too.
When the Energy Department drafted a chapter for the report about how to increase domestic energy production, the text mentioned the importance of hydraulic fracturing, a method of accelerating production of natural gas wells. It so happens that Halliburton is a major provider of the service.
Chemicals and sand are injected under high pressure into gas-bearing geological formations, causing underground cracks. The gas rises into the cracks and moves closer to the well, making recovery easier.
The process has its foes. Neighbors of natural gas wells in Alabama complained of oily goop and sulfur smells streaming out of faucets just after a company conducted fracturing. An Alabama federal appeals court ordered the state to regulate the process--and EPA to step in if needed. Natural gas drillers, and hydraulic fracturing purveyors, expect similar lawsuits to be filed in the Rocky Mountain states, according to material submitted to the task force by the Domestic Petroleum Council.
The EPA is studying whether hydraulic fracturing is linked to water well contamination but doesn't expect to finish its preliminary inquiry until at least February. The agency will decide then if further research is warranted, officials said.
Halliburton complained in federal court, during Cheney's last year at the company, that new federal restrictions on the process would "have a significant adverse effect" on its business.
The Energy Department chapter mentioned the environmental controversy as well as the potential of hydraulic fracturing. With the Energy Department chapter in hand, a Cheney assistant informed an EPA official in late March that hydraulic fracturing would go on the April 3 agenda for the Cabinet-level gathering. The agency was advised to prepare a recommendation.
EPA officials balked at suggesting any actions for the task force before the study was completed. The subject disappeared from the agenda by the day of the meeting.
But it didn't disappear from the final report. The document emphasized the technique's importance as "one of the fastest-growing sources of gas production" and noted that "each year nearly 25,000 oil and gas wells are hydraulically fractured." The information about potential water well contamination, the appeals court decision and the possibility of EPA controls had all been dropped.
A few paragraphs after the hydraulic fracturing discussion comes the task force recommendation that the nation "promote enhanced oil and gas recovery from existing wells through new technology."
Halliburton spokeswoman Wendy Hall said company executives did not discuss the energy report with Cheney. "Of course, we talk to him; you don't work with someone for that long and then not talk to him. But not about the plan, and not about hydraulic fracturing."
Coal
Perhaps the biggest winner in the task force report was coal.
Though coal produces more than half of the country's electricity, natural gas dominates the next generation of power plants. The reason: clean air rules. Burning coal produces a significant amount of carbon dioxide, which has been linked to global warming, and other elements tied to acid rain and smog.
Under President Clinton, " 'coal' was a dirty word," said John Feddock, an industry analyst based in Bluefield, Va.
Not so under Bush, whose U-turn on carbon dioxide was the coal industry's biggest victory in Washington in years.
"If rising electricity demand is to be met, then coal must play a significant part," the task force report stated. The plan recommended spending $2 billion in federal money for research into making coal-fired electricity cleaner. And the task force recommended directing federal agencies "to provide greater regulatory certainty relating to coal electricity generation."
"The president is friendly to energy, and so is the vice president, and thank God," said Fred Palmer, a vice president at Peabody Energy, the world's largest coal producer. "Our society needs energy."
Peabody, an affiliate called Black Beauty Coal and their employees have directed $900,000 to Republican coffers over the last two years. Peabody Chief Executive Irl F. Engelhardt personally gave $100,000 to Bush's inaugural committee.
Two Peabody executives and one from Black Beauty were named to Bush's energy advisory team after his election victory.
Two weeks after the task force was formed, Peabody announced plans to make a public stock offering. Several weeks later, on March 1, Palmer and Engelhardt attended a coal-interests meeting with task force members Abraham and Lindsey and Cheney's energy director.
On May 21, five days after the task force report touted coal, Peabody's stock went on sale. The company received $420 million, about $60 million more than analysts expected.
Could Peabody have gone public if Al Gore had beaten George W. Bush?
"That's an interesting question," Palmer said. "We'd been working on [the stock offering] for a long time. But it picked up steam this year, no question. I am sure it affected the valuation of the stock."
Conservation
Environmental leaders say they never got a real chance to influence the report in favor of greater conservation efforts and renewable power.
Just after the election and again in January, when the task force was announced, several groups requested meetings with Bush, Cheney or both.
Months passed without a reply.
Dan Becker, legislative director at the Sierra Club, heard suddenly from an Energy Department staffer in late March: Please give us your thoughts on the plan. We need them within 24 hours. Then, he says, the caller mentioned that Abraham was traveling and wouldn't be reading the response.
On April 3, the Energy Department submitted a briefing paper on nuclear power to the vice president's office, recommending the U.S. use more of it. Under "pros," the paper noted that this policy would be "a bold step" and added that it would underscore "the responsible approach of the administration towards carbon emissions"--the global warming issue.
But under "cons," the paper noted: "Environmental groups will sharply criticize any proposed expansion" because of waste disposal issues and the history of accidents at Three Mile Island and Chernobyl. Environmentalists will "use the proposal to fund-raise and organize to defeat the administration's policy, and use the proposal to suggest our national energy policy is out of the mainstream." Nuclear power would go on to win a place in the report as "a major component of our national energy policy."
By this time, the task force was well aware that environmentalists would be unhappy about many aspects of the report.
The panel had already abandoned its original plan for a release date of April 6. It was too close to Earth Day, a staffer with knowledge of the discussion said, and it would offer much too tempting a target.
In this wary atmosphere, Lundquist met April 4 with 15 emissaries from environmental groups.
The assembled activists barely had time to introduce themselves in the allotted 50 minutes. "To characterize it as meaningful consultation is quite a stretch," said Elizabeth Thompson, who attended for Environmental Defense.
Ris, from the Concerned Scientists, asked twice to meet directly with Cheney "to no avail," according to a memo written afterward by one of the participants.
Environmental leaders finally sat down with Cheney on June 5, weeks after the report was released.
The environmentalists' clear anti-Bush sentiments during the election campaign sealed their fate, said William K. Reilly, who headed the EPA when Bush's father was president.
"They have roles to play," he said. "But they're not going to be insider roles."
Times staff writers Robert Patrick, Megan Garvey and Richard Simon contributed to this story.
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Sunday, Jan. 13, 2002
It was supposed to be a week in which George Bush made common cause with the common man, a week of speeches and photo ops to show that the President who whipped the Taliban could also save our jobs and fix our schools. But when a gust of news blew the Enron mess from the business section to the front page, the country saw a tense, cautious President trying his best to distance himself from one of his biggest campaign contributors, the friend he used to call "Kenny Boy." In the Oval Office on Thursday, Bush told reporters he hadn't seen "Mr. Lay" since last spring.
So far, there is no evidence that anyone in the Administration did anything wrong or that the half a million dollars that Lay and his fellow Enron executives invested in Bush's political career over the years bought them any special favors. But Bush knows he stands in the line of fire. Democrats have been unable to hang the recession on him, but many hope that Enron's hapless employees--whose retirement nest eggs vaporized even as their bosses were selling off more than $1 billion of their own stock--become the image that sticks. The Enron debacle goes to one of the most basic questions Americans ask about their President: Whose side is he on? Pre-September surveys showed a hardening perception that Bush doesn't care about the concerns of the average person. In a New York Times poll last June, 57% of those surveyed said the Administration's policies favored the rich, and 63% said Bush was a "typical Republican." Though his public approval soared after Sept. 11, White House officials fear Bush has not entirely shaken the idea that he cares more about corporations than about the people who work for them. "Kenny Boy" reminds folks of that.
The Enron mess has reawakened Washington's instant scandal culture, with the entirely predictable twist that Democrats and Republicans have exchanged their well-practiced roles. But there's one obvious comparison that Bush's advisers are at great pains to deny. "There is no war room, no task force, no team of lawyers working day and night to battle the Democrats," says an aide. "This is not the Clinton White House." The Administration finally disclosed last week how many meetings Enron representatives had last year with Vice President Dick Cheney or his staff--six, including one as late as October, when Enron was going down the tubes, although those officials say they never discussed its fortunes. But the Administration continues to fight General Accounting Office efforts to find out who else Cheney talked to when he was developing his energy plan. A GAO lawyer told TIME the agency is hiring attorneys "with Supreme Court experience" in the event that it proceeds with a federal lawsuit to force Cheney to divulge the material.
Bush was not above a little Clintonesque shading of the truth last Thursday as he described his relationship with Lay. "He was a supporter of [Democratic incumbent Governor] Ann Richards in my run in 1994," said the President, adding that he got to know Lay after that. This came as a surprise to a great many people in Texas, as Lay and his wife contributed $47,500 to Bush's campaign that year (and a mere $12,500 to Richards') and Enron's political-action committee and executives donated nearly $100,000 more to Bush, according to the watchdog group Texans for Public Justice. Lay had even contributed to Bush's unsuccessful race for Congress in 1978.
Amid all their self-congratulatory talk about being forthcoming--getting "in front of the story," as it's known in Washington--Bush officials insist they see nothing odd about the idea that it took nearly three months for Commerce Secretary Don Evans and Treasury Secretary Paul O'Neill to inform the White House that Lay had come to them seeking help as the company was going under. If the White House's story is so clean--Enron asked; we said no--why wait three months to tell it?
Last week news of the calls to Evans and O'Neill kicked the Democrats into high gear, targeting Bush as an enemy of the little guy. The White House, said Democratic Congressman Henry Waxman, "had knowledge that Enron was likely to collapse but did nothing to try to protect innocent employees and shareholders, who ultimately lost their life savings." And it's not just the Waxmans of the world that Bush has to worry about. Louisiana Republican Billy Tauzin, chairman of the House Energy and Commerce Committee, the first to announce a formal congressional probe, has already sent investigators to the Houston offices of both Enron and its accounting firm, Arthur Andersen.
No wonder Bush tried to change the subject last week. He spoke of fixing the 401(k) pension laws and regulations that let Enron's bankruptcy become a personal tragedy for its workers. Bush's first challenge is to convince Americans that he didn't use his influence to protect one of his biggest campaign contributors. His larger one is to convince them he will use that influence from now on to protect them from future corporate shell games.
Sunday, Jan. 13, 2002
Just four days before Enron disclosed a stunning $618 million loss for the third quarter—its first public disclosure of its financial woes—workers who audited the company's books for Arthur Andersen, the big accounting firm, received an extraordinary instruction from one of the company's lawyers. Congressional investigators tell Time that the Oct. 12 memo directed workers to destroy all audit material, except for the most basic "work papers." And that's what they did, over a period of several weeks. As a result, FBI investigators, congressional probers and workers suing the company for lost retirement savings will be denied thousands of e-mails and other electronic and paper files that could have helped illuminate the actions and motivations of Enron executives involved in what now is the biggest bankruptcy in U.S. history.
Supervisors at Arthur Andersen repeatedly reminded their employees of the document-destruction memo in the weeks leading up to the first Security and Exchange Commission subpoenas that were issued on Nov. 8. And the firm declines to rule out the possibility that some destruction continued even after that date. Its workers had destroyed "a significant but undetermined number" of documents related to Enron, the accounting firm acknowledged in a terse public statement last Thursday. But it did not reveal that the destruction orders came in the Oct. 12 memo. Sources close to Arthur Andersen confirm the basic contents of the memo, but spokesman David Tabolt said it would be "inappropriate" to discuss it until the company completes its own review of the explosive issue.
Though there are no firm rules on how long accounting firms must retain documents, most hold on to a wide range of them for several years. Any deliberate destruction of documents subject to subpoena is illegal. In Arthur Andersen's dealings with the documents related to Enron, "the mind-set seemed to be, If not required to keep it, then get rid of it," says Ken Johnson, spokesman for the House Energy and Commerce Committee, whose investigators first got wind of the Oct. 12 memo and which is pursuing one of half a dozen investigations of Enron. "Anyone who destroyed records out of stupidity should be fired," said committee chairman Billy Tauzin, a Louisiana Republican. "Anyone who destroyed records to try to circumvent our investigation should be prosecuted."
The accounting for a global trading company like Enron is mind-numbingly complex. But it's crucial to learning how the company fell so far so fast, taking with it the jobs and pension savings of thousands of workers and inflicting losses on millions of individual investors. At the heart of Enron's demise was the creation of partnerships with shell companies, many with names like Chewco and JEDI, inspired by Star Wars characters. These shell companies, run by Enron executives who profited richly from them, allowed Enron to keep hundreds of millions of dollars in debt off its books. But once stock analysts and financial journalists heard about these arrangements, investors began to lose confidence in the company's finances. The results: a run on the stock, lowered credit ratings and insolvency.
Shredded evidence is only one of the issues that will get close scrutiny in the Enron case. The U.S. Justice Department announced last week that it was creating a task force, staffed with experts on complex financial crimes, to pursue a full criminal investigation. But the country was quickly reminded of the pervasive reach of Enron and its executives—the biggest contributors to the Presidential campaign of George W. Bush—when U.S. Attorney General John Ashcroft had to recuse himself from the probe because he had received $57,499 in campaign cash from Enron for his failed 2000 Senate re-election bid in Missouri. Then the entire office of the U.S. Attorney in Houston recused itself because too many of its prosecutors had personal ties to Enron executives—or to angry workers who have been fired or have seen their life savings disappear.
Texas attorney general John Cornyn, who launched an investigation in December into 401(k) losses at Enron and possible tax liabilities owed to Texas, recused himself because since 1997 he has accepted $158,000 in campaign contributions from the company. "I know some of the Enron execs, and there has been contact, but there was no warning," he says of the collapse.
Bush told reporters that he had not talked with Enron CEO Kenneth L. Lay about the company's woes. But the White House later acknowledged that Lay, a longtime friend of Bush's, had lobbied Commerce Secretary Don Evans and Treasury Secretary Paul O'Neill. Lay called O'Neill to inform him of Enron's shaky finances and to warn that because of the company's key role in energy markets, its collapse could send tremors through the whole economy. Lay compared Enron to Long-Term Capital Management, a big hedge fund whose near collapse in 1998 required a bailout organized by the Federal Reserve Board. He asked Evans whether the Administration might do something to help Enron maintain its credit rating. Both men declined to help.
An O'Neill deputy, Peter Fisher, got similar calls from Enron's president and from Robert Rubin, the former Treasury Secretary who now serves as a top executive at Citigroup, which had at least $800 million in exposure to Enron through loans and insurance policies. Fisher—who had helped organize the LTCM bailout—judged that Enron's slide didn't pose the same dangers to the financial system and advised O'Neill against any bailout or intervention with lenders or credit-rating agencies.
On the evidence to date, the Bush Administration would seem to have admirably rebuffed pleas for favors from its most generous business supporter. But it didn't tell that story very effectively—encouraging speculation that it has something to hide. Democrats in Congress, frustrated by Bush's soaring popularity and their own inability to move pet legislation through Congress, smelled a chance to link Bush and his party to the richest tale of greed, self-dealing and political access since junk-bond king Michael Milken was jailed in 1991. That's just what the President, hoping to convert momentum from his war on terrorism to the war on recession, desperately wants to avoid. The fallout will swing on the following key questions:
Was a crime committed?
The justice investigation will be overseen in Washington by a seasoned hand, Josh Hochberg, head of the fraud section and the first to listen to the FBI tape of Linda Tripp and Monica Lewinsky in the days leading to the case against President Clinton. The probe will address a wide range of questions: Were Enron's partnerships with shell corporations designed to hide its liabilities and mislead investors? Was evidence intentionally or negligently destroyed? Did Enron executives' political contributions and the access that the contributions won them result in any special favors? Did Enron executives know the company was sinking as they sold $1.1 billion in stock while encouraging employees and other investors to keep buying?
"It's not hard to come up with a scenario for indictment here," says John Coffee, professor of corporate law at Columbia University. "Enough of the facts are already known to know that there is a high prospect of securities-fraud charges against both Enron and some of its officers." He adds that "once you've set up a task force this large, involving attorneys from Washington, New York and probably California, history shows the likelihood is they will find something indictable."
Enron has already acknowledged that it overstated its income for more than four years. The question is whether this was the result of negligence or an intent to defraud. Securities fraud requires a willful intent to deceive. It doesn't look good, Coffee says, that key Enron executives were selling stock shortly before the company announced a restatement of earnings.
As for Arthur Andersen, criminal charges could result if it can be shown that its executives ordered the destruction of documents while being aware of the existence of a subpoena for them. A likely ploy will be for prosecutors to target the auditors, hoping to turn them into witnesses against Enron. Says Coffee: "If the auditors can offer testimony, that would be the most damaging testimony imaginable."
What about other probes?
Enron is in the cross hairs of at least six congressional panels. In the Senate, the Permanent Investigative Subcommittee got a jump on Jan. 11 by subpoenaing documents of 49 Enron executives and, separately, the corporate records of Enron and Arthur Andersen. The subpoenas, covering the period from 1999 through 2001, are aimed at learning "what the officers knew and what they did about it," said a committee official. The first hearing this year is scheduled for Jan. 24, headed by Connecticut Democrat Joe Lieberman. The first appearance of Enron chairman Lay is scheduled for Feb. 4 before the Senate Commerce Committee.
There are now 47 class actions against Enron and its executives and directors, filed either by shareholders or employees and carrying mainly the possible penalty of heavy fines. Most allege that Enron failed to disclose its many risky partnerships, which proved to be a large part of its undoing. Though Enron is bankrupt, Arthur Andersen could be liable as well, and Enron's officers and directors have deep pockets. Plaintiffs are seeking to freeze the proceeds of Enron stock sales by those insiders. "Going after directors personally is rare. But this case calls for the unusual," says Jim Newman, executive director of Securities Class Action Services, which monitors such cases.
Were favors received?
At the White House last week junior aides were asking Washington veterans whether they will have to hire lawyers because they attended meetings in which Enron issues were discussed. Answer: probably not—but the question shows the level of concern. Though there has been no evidence of anything illegal, Enron enjoyed considerable influence from the start of the Bush Administration. Curtis Hebert Jr., the former chairman of the Federal Energy Regulatory Commission, told the New York Times that Lay offered to support Hebert's continuing in that role if Hebert would take a friendlier view toward energy deregulation. Hebert declined, and the Bush Administration replaced him. Lay and other Enron officials met six times with officials led by Vice President Dick Cheney (a former oilman) to craft a new energy policy. That policy, not surprisingly, was friendly to Enron and other energy companies.
Bush says he first learned last Thursday that Lay had approached his Cabinet secretaries for help. Press secretary Ari Fleischer told Bush he should expect to be asked about any contacts that he had with Lay. Fleischer had researched the matter, and he "refreshed" the President's memory about the last time he met with Lay: in spring 2001, in Houston, at an event hosted by Bush's mother. O'Neill was present at the Thursday discussion and said, "Oh, by the way, you need to know that I had a conversation with Ken Lay. He called me." O'Neill described the call as a "heads up" about Enron's financial woes and the potential effects they might have on the larger economy. Bush nodded. Then Evans, also present, chimed in. "I got a call from Ken too," said the Commerce Secretary, who is Bush's closest friend. "He was asking me to help, but I didn't."
While Bush and the Republicans have gained the lion's share of attention from Enron and Lay, they get at least a little cover from the company's campaign contributions to prominent Democrats, such as Senate Energy Committee Chairman Jeff Bingaman and Louisiana Senator John Breaux. Enron and its top officials have hired the well-known Democratic lawyers Robert Bennett and David Boies. And Bob Rubin, the Democrats' high priest of economics and finance, was caught fishing—albeit tentatively by all accounts—for Treasury intervention on Enron's behalf.
Who will audit the auditors?
Mark Cheffers, CEO of accounting Malpractice.com, says of Arthur Andersen: "Even if they're innocent, it looks like a massive cover-up." Andersen reported its destruction of Enron documents to the SEC and Justice Department early last week—just before four congressional investigators arrived at the company's Houston office on Wednesday. Committee officials immediately demanded the personal records of the partner and five top executives working on the Enron account.
The incident further tars the name of venerable Arthur Andersen, which in June settled allegations of fraud stemming from its audit of Houston-based Waste Management and paid a $7 million fine without admitting any wrongdoing. Last year, again without admitting wrongdoing, Andersen agreed to pay $110 million to settle a class action brought on behalf of shareholders of another client, Sunbeam, which had misstated its financial results during the 1990s. These days, an Andersen competitor observes sardonically, settling a fraud case appears to be good for attracting business from other firms that want a soft touch for an auditor.
With the SEC, the Justice Department and various congressional committees now scrutinizing Andersen's audit work on Enron, there is little doubt efforts will be made to rein in the industry. "The profession has always done just enough to get out of a hole," says industry analyst Arthur Bowman. The SEC and Congress are looking into Andersen's interpretation of accounting rules that allowed Enron to exclude losses at several partnerships from its balance sheets. But the larger issue will be the objectivity of the entire industry. Enron paid Andersen $25 million for its audit last year and $27 million for "consulting" and other services. "How can any auditor be independent when his client is paying this kind of money?" Bowman asks.
Two of Enron's senior financial executives had previously worked for Andersen in Houston: Richard Causey, Enron's chief accounting officer, and Jeffrey McMahon, chief financial officer. Although it's not unusual for auditors to be subsequently hired by their clients, Andersen has an unusual history—in Waste Management's case, supplying every CFO from 1971 to 1997.
Can 401(k)s be protected?
There has been some movement in congress for reform, spurred by the plight of Enron workers who had, on average, 62% of their 401(k) savings tied up in Enron stock. Those savings were largely wiped out because the plan offered little opportunity to diversify. Like many corporate plans, Enron's didn't allow participants to transfer stock that had been given to them as part of a matching contribution until age 50. And Enron officials actively encouraged workers to buy Enron stock. In a memo in August, Lay told employees he'd "never felt better about the prospects of the company. Our growth has never been more certain." Enron workers were further hamstrung by Enron's switching of plan administrators and freezing of all asset shifting within 401(k) accounts for at least 10 days, just as Enron stock was taking its dive. The result was ruin, as Enron sank from $90 to under $1.
Democratic Senators Barbara Boxer of California and Jon Corzine of New Jersey have proposed that plan assets be limited to no more than 20% of any one stock. Their bill would also reduce tax breaks for companies that make matching contributions with stock and would free employees to sell matching stock after 90 days. Senator Bingaman wants to allow companies to offer financial advice without being liable for investment losses, as they currently are.
Says David Certner, chief lobbyist for the American Association for Retired Persons: "In 401(k) plans, we are asking people to take the risk and responsibility for investing, yet we set up this system where we are violating the first basic rule of investing: diversification." Where company stock is a savings option, employees invest almost a third of their assets in it.
Behind all the front-page headlines last week, Enron was struggling to manage its bankruptcy reorganization. One key all along has been to keep the vaunted energy-trading unit operating. That group accounted for 90% of Enron's revenue, and Friday it was sold at auction to UBS Warburg for a price to be disclosed this week. The courts must approve the sale, however, which promises to spark legal fireworks from creditors, who will want to make sure the company got a fair price. Not that it will matter much to Enron. The company has little chance of emerging from Chapter 11 intact. Says Peter Chapman, president of Bankruptcy Creditors' Service: "Assets are being liquidated for the benefit of creditors." But even if the company disappears, the name Enron will be with us for a while.
—With reporting by Michael Weisskopf, Adam Zagorin and James Carney/Washington; Cathy Booth Thomas/Dallas; and Bernard Baumohl, Unmesh Kher, Desa Philadelphia and Julie Rawe/New York
Enron's Influence Reached Deep Into Administration Ties Touched Personnel and Policies
By Dana Milbank and Glenn Kessler Washington Post Staff Writers Friday, January 18, 2002; Page A01
As presidential candidate George W. Bush's top economic adviser in 2000, Lawrence B. Lindsey was also a paid consultant to Enron Corp. At one point, those two roles merged.
For $50,000 a year, Lindsey attended meetings in 1999 and 2000 of the energy company's economic "advisory board." In those sessions, Enron Chairman Kenneth L. Lay convinced Lindsey of the wisdom behind one of Enron's businesses, a consulting operation that advised companies on energy efficiency.
"It stuck with me," Lindsey said in an interview yesterday.
In fact, Lindsey incorporated Lay's ideas into the Bush campaign's energy policy. During the campaign, Lindsey described Lay's contribution as key.
The cozy relationship -- in which a Bush campaign adviser, being paid by Enron, placed an Enron idea on the candidate's agenda -- served as one more reminder of the political influence and reach of the once-giant energy company. Its ties extend deep into President Bush's staff, appointments, Cabinet members, friends, family -- and his own past.
According to financial records, 35 administration officials have held Enron stock. A few, such as top Bush political adviser Karl Rove, had six-figure holdings. Several others -- Lindsey, U.S. Trade Representative Robert B. Zoellick, Commerce Department general counsel Theodore W. Kassinger, Maritime Administrator William G. Schubert -- served as paid Enron consultants.
Bush's secretary of the Army, Thomas E. White, was vice chairman of the Enron business that Lay had described to Lindsey during the campaign. White had held between $25 million and $50 million in Enron stock in addition to options and other forms of remuneration. Newly appointed Republican National Committee Chairman Marc F. Racicot was an Enron lobbyist. Bush campaign adviser Ed Gillespie, sent in when Bush took office to get the Commerce Department up and running, was an Enron lobbyist.
Still others, such as Attorney General John D. Ashcroft and Energy Secretary Spencer Abraham, received campaign contributions from Enron, while many more -- including Securities and Exchange Commission Chairman Harvey L. Pitt, Federal Energy Regulatory Commission Chairman Patrick H. Wood III and Deputy Attorney General Larry D. Thompson -- have indirect ties to Enron or auditor Arthur Andersen. And Enron consulted on policy with top administration officials such as Commerce Secretary Donald L. Evans, Treasury Secretary Paul H. O'Neill and Vice President Cheney.
There has been no indication that the administration's ties to Enron are illegal, and the giant company had similar connections to several Democrats and Republicans in Congress. But the sheer volume of Enron connections to the executive branch offers a study in the long reach of a powerful campaign contributor and aggressive corporation. Though the administration says it made no effort to keep Enron afloat, the extensive ties between the two may present Bush with a political difficulty if Democrats can create a perception of guilt by association.
Enron began in 1985 as a traditional gas pipeline company, but transformed itself into an innovative trader of gas, electricity and other commodities. Its stock became a Wall Street favorite as it tried to enter markets for fiber-optics, movie rentals, paper, even advertising. Many of its businesses were regulated or otherwise affected by federal decisions.
Enron and its executives poured millions of dollars into the political process -- $1.7 million in the 2000 election alone, according to the Center for Responsive Politics.
Over the years, a series of actions by Congress and the FERC, which broke down the old monopoly of utility companies over power plants and transmission lines, benefited Enron. The company successfully lobbied for a regulatory exemption for futures trading in energy "derivatives," complex financial instruments that became its most lucrative business and contributed to its downfall. The Bush administration sometimes rebuffed Enron, however, such as when it refused to embrace an Enron-backed position on combating global warming.
Bush last week played down his ties to Lay. He said he "first got to know Ken" in 1994, when "he was a supporter of Ann Richards," the Democratic Texas governor whom Bush ousted. In fact, Bush knew Lay from their work on the 1992 Republican National Convention and the Bush presidential library. The current president received $47,500 from Lay and his wife in 1994 -- many times what Richards received. Lay has said he supported Bush, not Richards, in 1994.
Over the years, Lay and Enron interests have contributed more than a half million dollars to Bush campaign funds, according to the Center for Public Integrity, making him Bush's greatest patron. The Bush presidential campaign reimbursed Enron for use of its corporate jets. Lay, who got the nickname "Kenny Boy" from Bush, served on Bush's presidential transition advisory team for the Energy Department. Enron employee Cynthia Sandherr served on the transition team for the Commerce Department.
In the White House, four senior officials were listed as Enron shareholders. Three of them -- Cheney chief of staff I. Lewis "Scooter" Libby, congressional liaison Nicholas E. Calio and former communications adviser Margaret Tutwiler -- likely sold their interests or were not required to under ethics rules; full details will not be made public until May.
The fourth, Rove, whose Enron holdings were valued between $100,000 and $250,000, sold his shares last year after the value had fallen to $68,000; the Enron shares, which the White House said Rove purchased on his own, were part of a portfolio worth more than $2.3 million.
White House counsel Alberto R. Gonzales acknowledged last June that Rove took part in meetings that helped shape the administration's energy policy while he still owned stock in Enron and other energy companies. Gonzales, however, said the meetings were general in nature and not specific enough to be barred by conflict-of-interest regulations.
Also tied to Enron is Lindsey. His consulting firm, Economic Strategies Inc., counted an Enron unit among its many clients. Counting speaking fees and his multi-client business, Lindsey earned more than $1.1 million in 2000.
White House press secretary Ari Fleischer said that Lindsey, before Enron's Dec. 2 bankruptcy filing, led a White House "review" that monitored the impact of Enron's woes on energy markets. Lindsey said it was merely part of an ongoing monitoring of the energy markets by one or two aides. Democrats in Congress yesterday said Lindsey's actions may have violated federal conflict-of-interest regulations. Lindsey said his work was not "Enron-specific."
Cheney, himself a former Texas energy executive, was on a first-name basis with Lay, who met with the vice president to discuss development of the administration's national energy policy. In all, the vice president's office disclosed, the energy task force met six times with Enron representatives. Rep. Henry A. Waxman (D-Calif.), a critic of the task force, said "it seems clear that there is no company in the country that stood to gain as much from the White House plan as Enron."
A number of senior Bush aides have had routine or incidental contact with Enron. White House Chief of Staff Andrew H. Card Jr. was alerted by Commerce's Evans about a call from Lay expressing a desire for government help in the weeks before its bankruptcy. Bush budget director Mitchell E. Daniels Jr. received a call from Lay in October about prospects for the economic stimulus package. That package, as passed by the House, included a tax provision that would have provided Enron with a $254 million rebate, according to the Congressional Research Service.
Even Bush's homeland security director, Tom Ridge, had Enron ties. At Lay's urging, Bush called Ridge in 1997 when he was Pennsylvania governor to help with Enron's bid -- eventually successful -- to enter the Pennsylvania market.
At the Justice Department, Ashcroft and staff chief David Ayres -- Ashcroft's former campaign manager -- recused themselves from the Enron probe because of Enron contributions to Ashcroft's campaign funds.
The Justice Department decided that deputy staff chief David Israelite and communications director Barbara Comstock need not recuse themselves; both had worked for the Republican National Committee, which received hundreds of thousands of dollars from Enron. Thompson, Ashcroft's deputy, was a partner in a law firm, King & Spalding, that represented Enron, but he disagreed with a Democratic lawmaker who said Thompson should disqualify himself.
After Commerce's Evans received a call from Lay in which the Enron chief said he would value government calls to a private credit rating agency, Evans called into his office his counsel, Kassinger. Kassinger had earlier said he had provided "legal services" to Enron while a trade lawyer at the firm Vinson & Elkins LLP in Houston, Enron's hometown. Ultimately, Evans said, he decided not to intervene.
Treasury's O'Neill, who also got a call from Lay concerning Enron's dire finances, handed the matter over to Peter R. Fisher, the undersecretary for domestic finance. Fisher had holdings in Enron valued between $1,000 and $15,000 when he joined the administration, as did Mark A. Weinberger, the assistant treasury secretary for tax policy. Treasury's spokeswoman said Fisher's modest holdings were part of a trust that he does not control. O'Neill said the department provided no help to Enron, although it consulted with lenders.
Elsewhere in the administration, Trade Representative Zoellick received $50,000 in advisory fees from Enron and listed stock holdings between $15,000 and $50,000 -- relatively small percentages of his overall earnings and holdings (Zoellick sold his shares after joining the administration).
A score of other administration officials had Enron holdings, ranging from relatively small stakes held by Defense Secretary Donald H. Rumsfeld and Export Import Bank Chairman John E. Robson to holdings exceeding $100,000 by Charlotte L. Beers, the undersecretary of state for public diplomacy.
At the SEC, Pitt faced requests this week from congressional Democrats and the watchdog group Common Cause that he remove himself from his agency's Enron investigation because he had been a securities lawyer who represented Andersen, Enron's auditor. FERC Chairman Wood, a friend of Lay's, replaced Curtis Hebert Jr. Hebert told the New York Times last year that Lay had said he wouldn't back his reappointment unless Hebert changed his views on electricity deregulation.
Even since its bankruptcy filing, the vestiges of Enron continue to touch those around the president. Bush's brother, Florida Gov. Jeb Bush, flew to Houston yesterday for a $500-per-person fundraiser at the home of a former Enron president.
Staff writers George Lardner and Paul Blustein contributed to this report.
© 2002 The Washington Post Company
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