http://web.archive.org/web/20020617020702/www.truthout.org/docs_01/02.11A.Enron.Testimony.htm

t r u t h o u t | February 7, 2002

Complete Transcript House Subcommittee Hearings on the Collapse of Enron

Witnesses:
€ Andrew Fastow, former chief financial officer of Enron
€ Michael Kopper, former managing director of Enron
€ Richard Buy, chief risk officer, Enron
€ Richard A. Causey, chief accounting officer, Enron.
€ Jeffrey K. Skilling, former chief executive, Enron.
€ Herbert S. Winokur Jr., chairman and chief executive of Capricorn Holdings.
€ Robert K. Jaedicke, chairman of Enron's audit committee.

The committee is chaired by Rep. James Greenwood.

REP. GREENWOOD: (Sounds gavel.) Good morning. This hearing of the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee will come to order. And the chair recognizes himself for purposes of an opening statement.

We hearing this morning will be a painful one. We have met to continue our investigation into the collapse of the Enron Corporation. And as our investigations show, and as was borne out by Dean Powers's testimony two days ago, a number of our witnesses today were members of the corporate leadership team at Enron who must bear the greatest weight for its collapse.

Four of the witnesses here today will appear only brief. Messrs. Fastow, Kopper, Causey and Buy will all seek the protection against the danger of self-incrimination guaranteed by the Constitution to every citizen in the Bill of Rights. The duty of this subcommittee is to investigate the facts of the matter surrounding the collapse of Enron to determine what went so horribly wrong that the nation's seventh largest corporation had to seek protection from its creditors by filing for bankruptcy.

And once we have established those facts, we have an obligation to determine how our financial laws and regulations can be improved, so that in the future publicly-traded companies faithfully and completely report their financial actions and their true financial health. This is the only way to ensure that our investor confidence is restored, and that future investors will not suffer the fate of the many thousands who watched with horror as the work of a lifetime was swallowed up, and their life savings disappeared.

The facts uncovered to date seem clear enough. Two days ago we heard extensive and informative testimony from William Powers, dean of the University of Texas School of Law, and chairman of the special investigative committee of Enron's board of directors, who joined the board this past October solely to investigate the transactions between Enron and various partnerships.

Our own investigations into these transactions, along with Dean Powers's illuminating report, carefully detail the complex workings of these related party entities, as they were called. As the workings of these entities and associated schemes, such as Chewco, LJM1, LJM2, the Raptor transactions and Jedi become clearer, they also become more disturbing. In Dean Powers' words, "What we have found is nothing short of appalling."

Mr. Fastow, aided by a number of those witnesses subpoenaed here today, shared in huge fees totaling tens of millions of dollars to arrange and participate in bizarre transactions that were at the least imprudent, and at worst contrary to the very interests of the company, shareholders and investors they were duty bound to serve, apparently plundering millions at the expense of the company and its shareholders. In furthering these transactions, we have also learned they failed to follow the most basic rules of accounting. They also failed to adhere to any of the business tenets designed to avoid conflicts of interests.

In putting numerous deals together, Mr. Fastow and his subordinates managed apparently to represent both sides to a transaction. The Powers report and the dean's personal testimony on Tuesday could not have been any clearer or more firm in conclusion that these transactions were not designed to improve Enron's economic health. On the contrary, these deals magnified Enron's risks, hastening the day of collapse.

Sadly, it is increasingly clear that this collapse was not brought about by the isolated acts of rogue employees. A disaster of this magnitude requires the complicity of far more than a few bad apples. From senior managers to corporate directors to outside counsel and accountants, almost no one who had the power to sound the alarm, correct the situation, or prevent this debacle, did so.

As I stated earlier, four of the individuals who are at the center of these schemes will not testify today. Andrew Fastow, who was Enron's former chief financial officer; Michael Kopper was the former managing director of Enron Global Finance. While both of these individuals have provided some documents to committee investigators, they refused to be interviewed or provide all of the documents in their possession. They also have refused to come before us this morning voluntarily. They have come here under subpoena.

Rick Causey was Enron's chief accounting officer and Rick Buy was Enron's chief risk officer. We received word yesterday that neither of these individuals will testify today. Fortunately, committee investigators have had the opportunity to interview both Mr. Causey and Mr. Buy about these matters over the last month.

But reluctant witnesses will not keep us from getting at the truth. Again, the facts are investigation and Dean Powers' report appear to confirm that Mr. Fastow essentially masterminded the transformation of this company into the derivatives trading giant it was. He devised the transactions that were ostensibly aimed at moving volatile holdings off of Enron's books -- deals we understand now to have been fraudulent.

Mr. Kopper served as his chief lieutenant. He became the general partner of Chewco, whose mysterious dealings accounted for the single largest portion of Enron's financial restatements last November. Mr. Kopper also served as general manager of Mr. Fastow's two LJM partnerships.

Even without the testimony of Fastow, Kopper, Causey and Buy, we will still be able to get some important answers today. To this end, other witnesses today will include Enron officials who had dealings with Fastow and Kopper, and who attempted to alert others in Enron's senior management about the danger these deals represented to the company. We will also hear from Tom Bauer, the Andersen audit partner who worked on the Chewco transactions, who is expected to describe what Enron did and did not disclose about this highly troubling transaction.

Our last panel is comprised of senior Enron officers and directors who approved these partnerships and transactions, and who were responsible for ensuring the fairness and the appropriateness of the transactions in question. Their role in this, for good or ill, also needs to be established, and we want to give them the opportunity to speak for themselves. We will hear much talk today of such things as derivatives, the practice of hedging, and why certain transactions go on the books and others remain undisclosed. We will also learn more than any congressional committee to date on the murkiest of dealings Enron operatives engaged in.

We have before Congress for the first time a collection of the senior Enron players who knew why decisions were made, why the company chose to pursue this ill-fated course, what the company knew about the risks involved, and why they chose to act or not act the way they did. What we learn today I am confident will help this committee continue to construct a full and accurate picture for the public of what happened to cause this financial personal and corporate tragedy.

One final note. Like many Americans, I have tried to keep some perspective on this whole tawdry affair, to provide some perspective as well. The truth is that this story of financial collapse and betrayal is of epoch proportions. It is almost biblical in scope. So perhaps we need to look beyond all the gritty details of avarice and appetite to a larger lesson that all of us can share. In the Eleventh Chapter of the Book of Proverbs, the authors offer these prophetic words: "He that troubleth his own house will inherit the wind, and the fool will be a servant to the wise in heart." Perhaps that is the true lesson of Enron's failure.

I now recognize the ranking member of this subcommittee, Mr. Deutsch, the gentleman from Florida, for an opening statement.

REP. PETER DEUTSCH (D-FL): Thank you, Mr. Chairman. You know, our work here I think all of us at this point have a sense is much more important than really the specifics of this transaction, because we have benefited everyone in this room, everyone in this country, everyone in the world, of a system of transportation in capital markets that has really gained incalculable results. And I think what we have learned -- and we know more than we did a week ago or two weeks ago -- is that Enron -- the system failed, Enron failed, but the system also failed, because stockholders, the public, did not know what was going on in the company. And the statements did not fairly represent what the company was doing. And it was absolutely certain that was done with intent.

We have had a number of staff -- maybe up to 20 staff people -- try to unravel Enron, and obviously the SEC is working on this as well as the Justice Department. And we had a members meeting with staff yesterday evening where we were briefed. And one of the things that I asked the staff -- apparently there are about 4,000 partnerships -- I'm sure many of the people here could know the exact number. But there were 4,000 partnerships that Enron did. And I asked the staff to try to explain one of them to us of the 4,000, that maybe we can understand one, and just understand what was there. So I am going to try -- and I asked them for a relatively easy one -- maybe the easiest one. All right, this is what they have described as maybe the easiest one.

It's the LJM Rhythms transaction structure. And it started out as a normal transaction. Enron made an investment, an IPO, with Rhythms Net, an initial investment of $10 million. That investment then grew to a value of about $400 million. Enron had a lock-out provision in the IPO that they could not sell the stock. So Enron had a reason to try to lock in the stock price. That's a legitimate business transaction. So they were attempting to buy a put at the strike price. But as opposed to going to Goldman Sachs, what Enron did, and, Mr. Fastow, what you did, is you set up LJM Limited Partnership to sell the put to Enron. And what happened was Enron capitalized LJM partnerships with a value of about $200 million of Enron stock. As soon as that occurred, Mr. Fastow, who won't testify today, took a $30 million management fee as a general partner of LJM Partnership, at the same time he was chief financial officer or management -- as part of the management of Enron.

Right? Now, what happened was actually that partnership then set up a subsidiary which sold the put to Enron. But what happened to the stock value is it kept going down. And as it was going down, Enron kept putting stock into the general partnership. Why we believe this is illegal is that as opposed to buying a derivative from Goldman Sachs, where it would be an arms-length transaction, and the risk would be borne by Goldman Sachs, and they would have a true fee between them, there was no risk for the partnership, because it was guaranteed by Enron stock. And so the $400 million in gain that was attempted to be locked in, that stayed on the books of Enron, so anyone who wanted to try to understand what was going on in Enron would look at the books and see a $400 million gain, but effectively there was no gain. I mean, this is a scam. This is one of 4,000 scams. It's one of the simpler scams. But, again, our understanding is it wasn't just smart, it wasn't just around the edges -- it was in fact fraud. It was a criminal violation.

And I think what we are learning as we learn more and more -- and hopefully Enron is the exception in America -- that the case of Enron -- and I hope someone is going to try to defend this today, because you know I think I want to understand maybe there's another story that we haven't heard from our staff. Maybe there's another explanation which we don't understand. But what -- you know, hopefully Enron is in fact the exception in corporate America, that this is -- the corporation that is doing this is not living on the edge, looking for the gray area, but engaging in illegal activity, is engaged in fraudulent transactions.

And one analogy that I have mentioned at at least one other hearing that I will mention again today -- I keep reminding myself of the scene in "The Godfather" movie where Tom Hogan, who is the attorney for the godfather has a meeting with the godfather, and the godfather tells him, "Just remember, you can always steal more with a briefcase than with a gun." And I think what we have here is a case where literally about $4 billion was stolen from people. And it was stolen, unfortunately, from people, from real people, thousands of whom are suffering. And, again, you know, I've read biographies of half the people on the panel who are going to testify and not testify today, and I am sure -- you know, you are going to have to live with yourselves, regardless of the consequences of what happens with all these investigations.

But I will tell you on a personal basis as I look at this is that I hope you, in the dark night of your own souls, think about some of the people who in fact throughout the country, but particularly in the area of Texas, who literally lost their entire life savings, and whose lives effectively in many ways is destroyed because of your actions. Thank you, Mr. Chairman.

REP. GREENWOOD: The chair thanks the gentleman, and recognizes the chairman of the full committee, the gentleman from Louisiana, Mr. Tauzin.

REP. BILLY TAUZIN (R-LA): Thank you, Chairman Greenwood. And once again, let me express my gratitude to you, Jim, and to you, Peter, for the extraordinary way in which the subcommittee has conducted its business and has gone about this investigation. And I would be remiss if I did not once again thank my good friend, Mr. Dingell, the ranking member of our committee, for the again extraordinary cooperation we are getting on both sides of the aisle in this investigation. Other committees may be proceeding in a partisan, political manner, looking at this manner. I hope Americans recognize the extraordinary way the Democrat and Republican investigative team on this committee and our members are working together to try to get to the truth here. And I thank you again, Mr. Dingell, for that cooperation and that effort.

REP. JOHN DINGELL (D-MI): Thank you, Mr. Chairman.

REP. TAUZIN: We're getting close to the bottom of this collapse and this mess, and I believe the solid progress this week will help us tremendously as we determine not only what happened but what we in turn can do to assure that something like this doesn't happen again. We look forward this morning, of course, to the second portion of our hearing into the fraudulent transactions that brought this corporation down.

This past Tuesday, we heard a devastating report from the inside of the corporation, from the chairman of Enron's on investigative committee. This report outlined the extraordinary story of self- dealing, of deception, of bogus statements, of irresponsible management, and indeed, I believe, of outright fraud. And I say outlined because Dean Powers, in his report, did not have the ability, as the committee does, to compel the production of documents or testimony, and it was limited in scope. But it certainly reinforced the very troubling information we've been unearthing in this investigation.

I think it's epitomized by one little line in the first memo that one of our witnesses, Jordan Mintz, wrote on January 4th. And I quote, "Nicole has advised that if there is a general theme or guideline to follow in the preparation process of all these deals, it is to be as innocuous as possible in terms of descriptions, details, et cetera."

Despite all the complicated dealings and cross-dealings and self-dealing we are learning about, I still believe what we have before us is a simple story -- the simple story of old fashioned theft and explicable acts -- inexplicable acts -- that allow the perps to get away and to destroy the company. We know that the senior Enron employees who controlled these transactions -- Chewco, LJM-I and LJM- II, the Raptors and so many others -- participated in self-enrichment schemes at the expense of the company, and the shareholders, and its own employees.

And yet these schemes could have been stopped with proper oversight by certain senior executives, a few of whom are with us today. Absent their taken action, matters could have been put right by Enron directors who were ultimately responsible for the health of the company and the interests of the shareholders, but that didn't happen.

They allowed the CFO to work both sides of the negotiating table. They enabled him to participate in his own risky high-return transactions by effectively insulated him from the risk, and this assured his ability to take away tens of millions of dollars, and ensure that Enron would be on even more shaky ground as it ensured more risk and even riskier proposals. They allowed sweetheart deals -- literally -- as we've recently discovered, to take place among senior employees. And they allowed a fraud to be perpetrated on the shareholders. And they told the shareholders that the company was making money that it was actually losing, so the stock price would remain high -- so senior officers could sell of their shares and make millions, while the vast majority of the workers would be left holding empty pocketbooks.

Be sure the accountants and legal advisors assisted, wittingly or unwittingly, in the sham transactions. And we will have the opportunity to see how we might resolve some of those perverse incentives that allowed that to happen.

This morning, however, we have the opportunity to question several of the principals that could have prevented this collapse. They have a lot to answer for. We also have a couple of senior officers who attempted to alert those charged with policing those deals to no avail. That's a good story. We'll hear from some good officers in the company who smelled a cancer growing inside and tried to do something about it. We'll be able to explore today why they failed.

For example, we'll have before us Jordan Mintz, the current general counsel for Enron Global Development. He attempted to get then Enron president and CEO Jeff Skilling to sign deal approval sheets as was required, but he couldn't get Mr. Skilling to sign them. We're going to ask Mr. Skilling today about that, and we'll find out why those sheets were not signed -- why they were signed by everybody else but him. We'll have Enron board members, and we can ask them about the oversight of these transactions.

And finally, we have former CFO Andrew Fastow, and former managing director of Enron Global Finance, Michael Kopper -- who, any way you look at it, stood at the very center of these schemes. Now, they make take the Fifth Amendment today, and they have the right to do so, and we certainly respect that, but as the chairman said, we have other means of getting to the bottom of this thing. Our investigators are doing that. We are doing it in a deliberative, bipartisan way, and we're going to make it available to the American public as we try to not only unravel what went wrong here, but try to make sure again that it doesn't happen again to any other American company or to its employees, or to those who believe in the system by which investors can trust information upon which they make the judgments when buying and selling stock in this country.

We've got a big job to do. Today's a big step. And Mr. Chairman, again I want to thank you for the diligent, extraordinary work you and your minority member are doing for the full committee. And again, I want to thank Mr. Dingell for his extraordinary cooperation.

Thank you.

REP. GREENWOOD: I thank the chairman. Mr. Dingell.

REP. DINGELL: Mr. Chairman, I thank you. And I want to reiterate the words of our chairman, Mr. Tauzin, that this is a bipartisan investigation, and in it we will work together to get to the bottom of this sorry mess. And I want to commend Mr. Tauzin, the chairman of the committee, and also the chairman of the subcommittee for their labors in this and the staff which has worked together splendidly to bring us to where we are today.

We had hoped today that for the first time in this long investigation of Enron and the sorry matters associated with it, that we would hear directly from the people who created the partnerships, that brought Enron crashing down while they made millions of dollars for themselves. We had hoped to hear how all this had happened. We had hoped to hear what these people thought about the loss of jobs of thousands of employees, and the wiping out of the savings and retirement of thousands of more employees, retirees and investors. Pension funds and general investors in the market all have suffered because of the deceit, this behavior, grasping self-dealing, wrongdoing in the most scoundrelly and improper fashion.

But I note with some distress that most of the key players are staying silent, for what appears to be good reason. We know from the Powers Report that key executives misbehaved and that others claim to have been clueless about the wrongdoing that was going on. This leaves them with the unfortunate choice as to whether they were incompetent or corrupt -- or perhaps both. Clearly there's room that we can come to all of the above judgments, and it's pretty hard to find anybody in this nasty mess to be a person of innocence and character.

For years, they at Enron had played fast and loose with their numbers, with their ethics, with their public representations, and with their fiduciary duty to the shareholders. As long as the earnings and the stock went up, everyone was happy and no one needed to know exactly how these numbers were created. Enron's culture, moreover, discouraged anyone from raising objections. For employees, bonuses and their very jobs depended on being team players. The infamous rank and yank system that got rid of the bottom 10 percent of all employees every year could be and was manipulated to get rid of anyone who caused trouble.

Enron's executive suite seemed to be the personal sandbox of a group of golden boys who had been clever enough to structure financial vehicles that would take debt and losing assets off the books and turn them miraculously into income. It is interesting to note that lawyers, accountants, officers of the company, and others all profited from this.

Mr. Fastow, who almost got yanked because of his inability to achieve real earnings in one of Enron's energy divisions, became a star by creating false earnings when he could not create real earnings. Favoritism and chaos reigned in his Global Finance division, where people with insider information and paychecks from Enron got their bonuses from LJM-II for negotiating contracts for Mr. Fastow's and Mr. Kopper's partnerships with other Enron employees. If the Enron negotiators were too tough, they sometimes got personal calls from Mr. Fastow. Two people who were engaged to be married were negotiating against each other. Picture that if you please. One of them actually got a $60,000 payment from one of Mr. Kopper's partnerships for structuring a deal.

Mr. Skilling, the company's president and chief executive officer, was warned about the problems these partnerships were causing in the office. He did nothing except to find another job for the complainer.

Why (?) did others in positions of authority distinguish themselves? There were very few innocent parties in the board rooms and the executive suites at Enron. The board of directors approved these related party transactions because they were fast and cheap. In other words, debt and assets could be moved around quickly and Enron wouldn't have to pay investment bank fees. Then senior management and the board gave transactions to the company's chief financial officer because he would know where to find investors. That, as a former Securities and Exchange Commissioner said recently, a CFO, of all people, has to have an undivided loyalty to the company. We will inquire, as this go forward, as to where the loyalty here lay.

Such a structure is a recipe for disaster, and a disaster is clearly what followed. Enron, the seventh largest company in the nation, a darling of Wall Street, a public held company, failed, taking with it the incomes, the savings, the hopes, the aspirations, the dreams of its employees and its retirees. This committee and this Congress has a duty to find out what happened and to take all necessary action to correct the situation and to prevent the repetition of such a sorry, stinking mess. We may find the scandal is not only what was illegal. A greater scandal may very well be what was legal.

Mr. Chairman, I thank you.

REP. GREENWOOD: I thank the ranking member of the full committee. The gentleman from Florida, Mr. Bilirakis.

REP. BILIRAKIS (R-FL): Thank you, Mr. Chairman. We have a vote on the floor. I won't take long. I do not have prepared remarks. And the others before me and those after me will have gone into many of the details, which --

REP. DINGELL: Mr. Chairman, could I just note --

REP. GREENWOOD: Yes.

REP. DINGELL: -- if you please, one thing. There are a group of Enron employees here, hoping for justice, looking to see what has transpired, and watching the debates and the considerations of this matter by the committee with considerable interest, and I thank you for that. They're back against the wall over here.

REP. GREENWOOD: And I thank the ranking member. The gentleman from Florida will continue.

REP. BILIRAKIS: Well, thank you. You know, we sit in these hearings, Mr. Chairman, and I just wonder if, particularly the executives of Enron and the executives of the auditors, realize what they have done -- what they have done to, certainly to people, to stockholders, to employees of Enron, to America -- to those of us, really, who have always believed in the system, as Mr. Tauzin said, in the business community, in the concept that it takes employers to have employees. You're really shattering the strength that you have always had among those of us who feel very strongly and believe very strongly in the system.

And I realize -- I can't imagine that you don't realize what you've done. And on the other hand, with the apparent type of mindsets that may many of you must possess to have done what you have, maybe you really don't realize what you have done. You know, it took terrorists from other countries to tear this country and really the world asunder, and yet we have fellow Americans who have accomplished something that's almost as bad when we take into consideration what it's doing to the stock markets, what it's doing in confidence and faith of the American people in the system and in auditors particularly, and in the corporate community. There's a lot of anger here. And I just hope that you all realize that, and you realize that you have brought about that anger.

Having said that, Mr. Chairman, I yield back. Thank you.

REP. GREENWOOD: I thank the gentleman. The chair would like to advise the visitors and the participants here today that a vote is occurring on the floor of the house, and members have had to move over to the House floor to make that vote, but we'll continue the process of the opening statements so we can get to the witnesses as rapidly as possible. The chair recognizes at this point the vice chairman of the full committee, the gentleman from North Carolina, the distinguished Mr. Burr.

REP. RICHARD BURR (R-NC): I thank the chair. The chairman, Mr. Greenwood, said earlier that this was a painful hearing. I agree totally with that. This is also a sick hearing. It's a sick hearing because of the individuals. It's a sick hearing because investors are sick of the lack of transparency that existed in the Enron books. America is sick that greed drove decisions with no regard for the human lives that were affected by it. And today's pain is magnified even greater by the decision of some to say nothing.

I believe that there are individuals that will be asked to testify in front of this committee and have testified in front of this committee that believe, by remaining silent, that the anger will die or that we will go away or that America will forget. For those who have chosen that route, let me assure you, the anger will not die, we will not go away, and America will not forget what has happened.

Mr. Chairman, in its heyday, Enron ran a television ad, and its commercial touted their innovative corporation. I now know what that meant. But the Enron ad went on to show the Enron logo at the end, and it said, "Why? Why? Why?" You know, today we're here with the same logo and the same question: Why? Why? Why?

Mr. Chairman, I want to commend you for not only the subcommittee but the full committee's commitment to get the answers to the question, why, why, why. I yield back.

REP. GREENWOOD: The chair will gladly yield the gentleman as much time as he chooses. But in the absence of other members prepared to make opening statements now, we're going to suspend for at least five minutes until the next member is with us.

(Recess.)

REP. GREENWOOD: The committee will come to order. The guests will please be seated. The chair recognizes the gentlelady from Colorado for five minutes for an opening statement.

REP. DIANA DEGETTE (D-CO): Thank you, Mr. Chairman. And I want to thank both you and the chairman of the full committee and Mr. Dingell also for these unprecedented last couple of weeks. We've received a crash course in corporate management, special-purpose entities and auditing and accounting practices.

This debacle has been a sobering revelation of the dark side of arrogance, greed and apparent disdain for legitimate public safeguards. I understand we have a number of Enron employees here today, and I will assure each and every one of you that we will get to the bottom of this. We will find what happened and we will make sure it never happens again, to the best of our ability.

By the time we finish this investigation, Enron may be the most analyzed, dissected and discussed corporation in history. I don't think any of us like what we've seen. I wonder about the mindset, for example, that allowed sketchy partnerships to be created, rife with conflicts of interest which are undisclosed. I've tried to conceptualize decisions that allowed lower-level employees, like the folks here today, to lose their life savings while senior executives walked away with millions of dollars without seemingly doing anything for that money.

I've come to realize that there are some people who think they are smarter than the system and are willing to risk what is not theirs for personal gain. And I'm shocked by the apparent ambivalence at best by a board of directors who somehow seems to feel that when employees and officers are self-dealing, that these same people, the fox is guarding the hen house, should somehow come to the board and independently give this information to the board rather than the board ferreting out, which I think is their fiduciary duty.

Mr. Chairman, I have a long opening statement here, but I think I'd rather get to what the witnesses have to say. And so I'd ask unanimous consent to submit the whole opening statement for the record, and I'll yield back the balance of my time.

REP. GREENWOOD: Without objection, the statement of the gentlelady in its entirety will be incorporated into the record.

The chair recognizes, for purposes of an opening statement, the gentleman from Florida, Mr. Stearns.

REP. CLIFF STEARNS (R-FL): Thank you, Mr. Chairman. And let me again compliment you and the staff for a very thorough job here investigating something that, as we look into it more deeply, gets worse and worse.

When you look at the presentation that Mr. Deutsch provided, it's probably a little complicated to most Americans. But I would give the analogy -- it's basically the analogy of these special-purpose entities; Enron was putting money in their right pocket of approximately, let's say, $10, and then pulling out a fictitious amount of $400 out of their left pocket and calling that income.

Obviously, this is a case of failure to disclose. It'll be up to the Justice Department to prosecute this and to ferret out all the details. What we can do today, though, is to bring attention to this type of operation. When the Securities Act of 1933 was passed, the whole intent was that these individuals would provide disclosure.

My colleagues, in capitalism, in a free market, unless there is a sense of compunction, a sense of consciousness, we can legislate till hell freezes over and we won't be successful. It's dependent upon men and women to put forth some honesty, and obviously it was not here.

I was alarmed to read in the Wall Street Journal that the top executives at Enron shielded their pension benefits. It wiped out the retirement saving of its workers. But they had the gall, the unmitigated gall, to have financial dealings where, for example, Enron Chairman Kenneth Lay used a private partnership to protect millions of dollars worth of executive pension benefits. So the more we look into this, the more appalling it gets.

I imagine we're going to encounter today from Mr. Skilling what's caused plausible deniability regarding his role or knowledge of these transactions. However, I believe you'll find this panel extremely skeptical, as our investigation has uncovered numerous warnings, some directly reporting -- that were reported to Mr. Skilling as to the problems with the various transactions. We have the Watkins memo to Ken Lay in August, which also mentioned former executive Cliff Baxter's conversation to Skilling regarding these transactions.

We also have before us Mr. McMahon, former treasurer, now president and COO of Enron, who also repeatedly raised concerns, and Jordan Mintz, former general counsel of Enron Global Finance and current general counsel of Enron Global Development, who also raised concerns. There are plenty of flags. People were just denying the facts.

Arthur Andersen, in its role, appeared to have acquiesced in these dealings, despite concerns raised internally in a February 2001 memo. And again, I'd like to quote, as the chairman has, both the chairman of the full committee and the chairman of the Oversight Committee, from the Powers report that these transactions consisted of, quote, "a flawed idea, self-enrichment by employees, inadequately- designed controls, poor implementation, inattentive oversight," end quote.

We are indeed uncovering more and more information. Unfortunately, many of the folks today will use the Fifth Amendment, which they're entitled to do. But that leaves a general impression that something occurred here which was wrong, and they're afraid to incriminate themselves.

I would close, Mr. Chairman, by saying that something is going on here in space and time and that we, as members of Congress, have a fiduciary responsibility to ferret out the details and facts for the American people, and it's an awesome responsibility. And I yield back.

REP. GREENWOOD: The chair thanks the gentleman and recognizes, for an opening statement, the gentleman from Louisiana, Mr. John.

REP. CHRIS JOHN (D-LA): Thank you, Mr. Chairman. On Tuesday, this committee had a real opportunity to review and discuss the Powers report. It provided the subcommittee with at least a little glimpse of the questionable and, more likely, criminal activity that contributed to Enron's financial collapse. Yesterday the full committee had an opportunity to hear from experts in the auditing and accounting fields about what can we learn from the lessons at Enron.

Today, however, is the main event. While it appears that most of us will learn from the first three panels at most their ability to recite the Fifth Amendment, I'm hoping that the remaining witnesses can shed a little more light in the numerous partnerships and transactions and businesses with Enron.

It is important to remember, from a committee standpoint, that we, the members, do not sit as prosecutors, judges, jury members, in determining the guilt or innocence of our panelists. I have confidence in the ability of the U.S. Department of Justice to pursue justice of what clearly to me appears to be securities fraud, insider trading and obstruction of justice.

Illegal and unethical conduct of Enron officers and managers is an important component in our congressional investigation. But it is the legal loopholes and business practices of companies, exemplified by Enron's use of, quote, "aggressive accounting" that I feel is our primary charge of this subcommittee.

We cannot protect against every bad actor in corporate America who decides to willfully break the law, although we can make sure that the tools are available to regulators so that we can catch them. We can, however, make sure that shareholders and investors are not misled by inadequate disclosure, conflicts of interest, or -- may I quote from the Powers report -- "walking conflicts of interest," and a lack of independence in the performance of auditing functions.

Mr. Chairman, I believe today that we have the architects of Enron's house of cards. And I'm eager to hear from Mr. Skilling, and others, their views and their roles in the eventual collapse. The Powers report concluded that many of the partnerships created by the first three witnesses were, from the very beginning, fraudulently created because they transferred no risk and were designed for the very sole purpose of shifting debts and liabilities off balance sheets.

Worse still, these related party transactions allowed Mr. Fastow and others to enrich themselves with extraordinary compensation packages, which hardly seemed to justify, since these are the very transactions that were created and that created the chain reaction that destroyed the company, the seventh-largest company and the largest bankruptcy in the history of America.

I do not wish to paint all of the witnesses with one and the same broad brush. Mr. Mintz, for example, had the good sense to recognize a conflict of interest by Enron employees serving in positions in both the company of Enron and the partnerships, one of which was LJM, and made efforts many times to raise these concerns. Perhaps he can explain -- and I am eager to hear from him -- to the subcommittee why so few others appear to have recognized or expressed the same interest.

Mr. Chairman, no one on this committee wants to see the repeat of the events that brought down Enron. Hindsight often gives us 20/20 vision in many things that we do. And our challenge is to use these lessons that we will learn to make sure that there is no repeat performance in corporate America.

Our efforts will not restore the retirement savings of Enron employees who watched their 401(k) plans evaporate, nor will it return investors billions of dollars in equity that disappeared in a very, very few short months. However, with your continued leadership, Mr. Chairman, and the chairmen of our subcommittees, we can get to the bottom of this mess and take legislative action that this will never happen again.

With that, I yield back the balance of my time so that we can hear from the people the Powers report identifies as largely responsible for this American corporate disaster. Thank you, Mr. Chairman.

REP. GREENWOOD: The chair thanks the gentleman and recognizes, for an opening statement, the gentleman from New Hampshire, Mr. Bass.

REP. CHARLES BASS (R-NH): Thank you, Mr. Chairman. And I will be brief. We've had a series of hearings on this issue. We've become educated. The more we learn, the more nauseating the whole story becomes. There are issues of insider trading, non-disclosure, potential obstruction of justice, irregular accounting practices, and the list goes on.

A number of the witnesses will take the First Amendment today -- Fifth Amendment today, which is understandable. One, Mr. Skilling, will testify. I suspect that, as he said in a December interview, that what happened to Enron was a, quote, "tragedy," but not one for which he was responsible. He said in this interview, quote, "I didn't do anything wrong."

Well, I don't know whether ethics or immorality or cruelty or inhumanity are really right or wrong. I think they are wrong. I hope that after we get beyond the question of who wrote what memo to who, who put whose signature on a memo, the complexity of all the transactions are finally bared, for the horrible truth becomes evident, we really ask as a committee how much illegality occurred, firstly; and, secondly, what we can do as a full committee to make sure that this tragedy perpetrated by these business cowboys never happens again. I appreciate this hearing process. I think it's going to be long -- difficult -- but ultimately I think the investment world will be better off and the capital markets will be more reliable and honest as a result of our efforts today and in the days to come.

I yield back.

REP. GREENWOOD: The chair thanks the gentleman and recognizes for an opening statement the gentleman from Illinois, Mr. Rush.

REP. BOBBY RUSH (D-IL): Thank you, Mr. Chairman, for what has been the third hearing this week on this particular matter.

Before I begin I want to call your attention and the attention of the members of this committee that present in the room today we have one of the world's most outstanding citizens, a man whom I have known for many, many years -- for decades even -- a man who has played a pivotal role in my life on more than one occasion -- a man who is now fighting for the Enron employee, the Reverend Jesse L. Jackson. So would you please acknowledge him, Mr. Chairman, that Reverend Jackson is in the room with us today.

REP. GREENWOOD: The chair welcomes the gentleman, Mr. Jackson, to our proceedings this morning.

REP. RUSH: Mr. Chairman, I want to thank you for holding this hearing -- and I intend to be brief.

I understand those of you who have come under the most public scrutiny intend to avoid questioning this morning. And for those of you who refuse to testify and know your guilt, I ask you, Was it worth it? Was the selling of your morals worth it? Was the selling of your souls worth it?

In my state alone, the state of Illinois, state pensions plans lost a total of $34 million out of total of $1.4 billion nationwide that was lost. This was money, hard-earned money, set aside to provide secure retirement for thousands of citizens who have dedicated their lives to public service. These are the teachers who help raise our children and educate our children. These are the police officers who patrol our streets and protect our families and our homes. These are public servants who keep our cities and our towns and our villages running on a day-to-day basis.

The money in these pensions were supposed to fulfill these workers' hopes and their dreams, and provide a secure retirement for them. This morning, millions of dreams have been deferred, if not lost. This very morning millions of dreams have been denied. Parents are anguishing over how they will afford their children's education. Elderly workers are being forced to put off retirement indefinitely. And America's sense of financial security has been shaken at its very core.

Mr. Chairman, more than having these men explain their actions to the nation, more than making sure that the guilty are punished, this hearing is about returning the financial stability and sense of economic interest and security to our nation.

Just as the World Trade Center bombers have shaken the sense of personal security for millions of Americans, the Enron catastrophe has left our public without a sense of economic security. At the center of this economic meltdown, we find a handful of economic terrorists. But unlike most terrorists who base their actions on twisted and perverse ideals of justice and righteousness, the economic terrorists at Enron had one cause: selfishness and greed.

So, as we begin today's hearing, I ask each of you who profited from the downfall of thousands whether it was worth it. I suspect that some of you may answer yes. However, I sincerely hope that you live long enough to regret that particular sentiment. Thank you, Mr. Chairman. I yield back the balance of my time.

REP. GREENWOOD: The chair thanks the gentleman and recognizes for purposes of an opening statement the gentleman from Oklahoma, Mr. Largent.

REP. STEVE LARGENT (R-OK): Thank you, Mr. Chairman. I too will be brief in an effort to move this hearing forward and try to bring a little perspective and balance to my comments here.

Mr. Chairman, as you know, last night we prepared for this subcommittee hearing. Our subcommittee and staff met about six o'clock last night, and I was particularly impressed by some comments that you made that I felt like really brought some focus for the purpose and intention of this hearing. It's not a time for us to demagogue, although there is a lot of that going on, or even to prosecute -- that's up to the Justice Department to figure out what laws currently on the books have been broken, and I am sure that they will do a competent job of that.

But, rather, the purpose for this hearing is to find out the laws that were not broken, but the things that were done in this Enron debacle that were legal but perhaps shouldn't be. And I think that is the purpose of this hearing. And I look forward to hearing the testimony of the folks who are on the panels today, so that we can find out and help prevent perhaps through the passage of additional laws that are not on the books but should be. And so, Mr. Chairman, with that, I thank you for holding this hearing and I look forward to the testimony and yield back my time.

REP. GREENWOOD: The chair thanks the gentleman and agrees with him, and recognizes for an opening statement the gentleman from Michigan, Mr. Stupak.

REP. BART STUPAK (D-MI): Thank you, Mr. Chairman. Over the past several weeks we have held numerous hearings to explore this house of cars that was once the muddy Enron Corporation. Yesterday we heard from a panel of experts who walked us through the accounting principles; the legal, ethical and moral principles that should be adhered to in corporate America.

In the past we have heard from Andersen employees about the shredding of documents and the destruction of e-mail that went on in an effort I am sure to cover up this whole mess. We have heard from Mr. Powers about his commission finding, and the actions of several Enron employees to set up special purpose entities to assist in cooking the books at Enron. We've heard and read about the totally lax oversight by Mr. Lay, Mr. Skilling and other executives on Enron's board of directors.

Enron's board of directors gave dangerous flexibility to Mr. Fastow in allowing him to establish several of these special purpose entities. They, the board of directors, supposedly put in a number of checks and balances in place when they waived their conflict of interests provisions. But thus far all the checks we have seen, tens and millions of dollars worth, went into bank accounts of Mr. Fastow and others.

There certainly were -- there certainly were no checks or balances in the equations, and no follow-up to make sure the company wasn't being bilked. We've learned new terms, like "aggressive accounting," which in this case translates, I believe, into making individuals richer while we stick it to the shareholders and the workers. I'm glad to see some of the Enron workers here today who gave so much and lost so much.

This new aggressive accounting I believe is a result of a new cavalier attitude in corporate America since the passage of the Securities Litigation Reform Act of 1995, or as some of us refer to it, "The Securities Rip-Off Litigation."

As I look at all that's happened, this new law, what it does -- it insulates corporations from legal actions by putting up roadblocks so employees and stockholders cannot take legal actions when the books have been stacked against them.

Mr. Chairman, it will be difficult, if not impossible, for Enron to reemerge as a credible company from bankruptcy without a comprehensive and complete purging of all Enron executives and board members who were at the helm during this whole debacle. They must be held accountable. And I hope the shareholders and the employees of Enron will do themselves a favor and get a true board of directors and new management team.

Mr. Chairman, I could go on with my statement, but I am going to yield back the balance of my time, because I am really interested to see who is going to testify, who is not going to, and look forward to the questioning and cross-examination. I appreciate your leadership in this whole matter. We spent a lot of time together in the last couple of weeks, and look forward to continuing on this Enron mess. Thank you.

REP. GREENWOOD: The chair thanks the gentleman. And we are almost there. The chair recognizes the gentleman from Ohio, Mr. Strickland, for an opening statement.

SEN. TED STRICKLAND (D-OH): Thank you, Mr. Chairman. Today we are taking an in-depth look at the corporate thievery and greed that resulted in the collapse of Enron. Thousands of people lost their jobs sand their retirement savings. Investors and shareholders lost billions in debt and equity. Plans and dreams of these people have gone up in smoke.

The American people have lost faith in the stock market, because they don't know if they can believe what publicly-held companies and their auditors are telling them about profits and losses. Enron's earnings weren't real, because they used financing and accounting sleights of hand so complex that even sophisticated analysts could not read them. Some of the people most responsible for this disaster are before us today and will take the Fifth Amendment. They are the ones who violated their fiduciary duty to Enron shareholders. But apparently they are seeking even more. According to the press yesterday, Mr. Causey and Mr. Buy are currently negotiating their severance packages from Enron, as is Kenneth Lay, the former president.

Let's review for a moment how some of these people have already benefited from their Enron stock, in addition to their most generous salaries. Mr. Causey, who was the chief accounting officer, has cashed out to the tune of $13.3 million. Mr. Buy received over $7 million in proceeds in 2001 alone. Kenneth Lay, Enron's former chairman and chief executive officer, made $18 million in salary and compensation in 2000, and received over $100 million in stock sale proceeds. He promised last year that he would give up his 60.6 million (dollars) severance package. But now he wants a severance package also it seems. Mr. Skilling, who took out 67 million in profits, plus his generous salary, got a consulting contract with Enron when he left. We will want to know more about his severance package today. Mr. Fastow got only 30 million (dollars) in stock proceeds from Enron, but he took another 30 million out with his side deals. Mr. Kopper got at least 10 million (dollars).

Over 4,000 former Enron employees who lost their jobs in the Enron debacle were given for the most part $4,500 in severance pay to get through the transition period. Some of them are in dire straits, as are a number of people with pension plans heavily invested in Enron stock. I think it would be appropriate to provide Mr. Lay, Mr. Causey and Mr. Buy each with $4,500 in severance pay to help them through the transition period. Any additional claims they may have should be part of the thousands of claims of the uninsured creditors that the bankruptcy court will handle. One cent on the dollar might be an appropriate recovery.

Whether the actions we've uncovered are illegal or legal will be determined. But we do know they were certainly unethical and immoral. Now, perhaps that's not important to the Enron business executives who have tried to walk away, embarrassed but rich. But it is important to the American people, and it must be important to those of us who were elected to represent the people. Consequently, we must do everything, Mr. Chairman, to see that whatever is necessary is done to see that such happenings never happen again. Thank you.

REP. GREENWOOD: The chair thanks the gentleman, and now calls forward our first witness. Our first witness is Mr. Andrew S. Fastow, former chief financial officer, Enron Corporation. Mr. Fastow is here pursuant to a subpoena served earlier this week. Mr. Fastow, if you will please be seated at the table. Mr. Fastow, you are aware that the committee is holding an investigative hearing, and when doing so has had the practice of taking testimony under oath. Do you have any objection to testifying under oath?

MR. FASTOW: No, sir, I do not.

REP. GREENWOOD: Thank you. The chair then also advises you that under the rules of the House and the rules of the committee you are entitled to be advised by counsel. Do you desire to be advised by counsel during your testimony today?

MR. FASTOW: Yes, Mr. Chairman. My counsel, Mr. John Keker, is seated next to me.

REP. GREENWOOD: Okay. For the record, could you spell Mr. Keker's name for us?

MR. KEKER: K-E-K-E-R.

REP. GREENWOOD: Thank you, Mr. Keker. In that case, would you please rise and raise your right hand, and I will swear you in? Do you swear that the testimony you are about to give is the truth, the whole truth and nothing but the truth?

MR. FASTOW: Yes, sir.

REP. GREENWOOD: In that case, will you please -- you are now under oath, and you may give a five-minute summary of your written statement. Do you have an opening statement, sir?

MR. FASTOW: No, sir, I do not.

REP. GREENWOOD: Okay. In that case the chair will then recognize himself for questions to the witness. Mr. Fastow, you are the CFO of a Fortune Ten company, a full-time job to be sure. Yet somehow you managed to also run two private equity funds, using your insider status at Enron to attract investors, and enrich yourself by tens of millions of dollars by doing deals, and highly questionable deals at that -- with your own company. You also, we have learned, used your power, position and influence to threaten and pressure Enron employees in an attempt to obtain favorable terms for your private partnerships. The question, Mr. Fastow, is how could you believe that your actions were in any way consistent with your fiduciary duties to Enron and its shareholders, or with common-sense notions of corporate ethics and propriety? How do you answer, sir?

MR. FASTOW: Mr. Chairman, I would like to answer the committee's questions, but on the advice of my counsel I respectfully decline to answer the question based on the protection afforded me under the Constitution of the United States.

REP. GREENWOOD: May we be clear, Mr. Fastow: Are you refusing to answer the question on the basis of the protections afforded you under the Fifth Amendment of the United States Constitution?

MR. FASTOW: Again, Mr. Chairman, on the advice of my counsel, I respectfully decline to answer the questions based on the protections afforded me under the United States Constitution.

REP. GREENWOOD: And will you invoke your Fifth Amendment rights in response to all of our questions here today?

MR. FASTOW: Yes, sir, Mr. Chairman.

REP. GREENWOOD: Okay, we regret that, but it is your right. It is therefore the chair's intention to dismiss the witness. But the committee of course reserves all of its rights to recall the witness at any time. Mr. Deutsch, do you agree with our decision?

REP. DEUTSCH: Mr. Chairman, you know, normally I would very easily. But I think that this might be the time that we are going to have any chance in a public setting to even attempt to ask Mr. Fastow questions. And I know that he is intending to invoke his Fifth Amendment prerogative, which I take very seriously. But at the same time, you know, within the restraints that he has -- and he has that right -- you know, I would ask him if there is any area that he feels he can discuss, any questions within the area of his -- you know, so our understanding -- I mean, I just go rebriefed by our staff on the Rhythms transaction, and still -- you know, and there will be some people who testify. But obviously this is a transaction that you set up, that you were the general partner of and CFO at the time.

REP. GREENWOOD: The chair must note that we would all of course like to question Mr. Fastow. But we have had our discussions with his attorney. We -- it is clear to Mr. Fastow and his attorney that should he invoke his Fifth Amendment, to which he is entitled, we would dismiss him. And we have not had this conversation up until this moment. So the decision of the chairman is firm, and Mr. Fastow, you are dismissed, and you may be on your way.

MR. FASTOW: Thank you, Mr. Chairman.

REP. GREENWOOD: The chair then would call forward our next witness, Mr. Michael J. Kopper, former managing director of Enron Global Finance. Good morning, Mr. Kopper.

MR. KOPPER: Good morning, Mr. Chairman.

REP. GREENWOOD: Mr. Kopper, do you have an opening statement?

MR. KOPPER: No, I do not.

REP. GREENWOOD: You are aware, Mr. Kopper, that this committee is holding an investigative hearing. And it is the custom and practice of this committee when holding an investigative hearing to take our testimony under oath. Do you have any objection to testifying this morning under oath?

MR. KOPPER: No, I do not.

REP. GREENWOOD: The chair should then advise you that under the rules of the House and the rules of the committee you are entitled to be advised by counsel. Do you desire to be advised by counsel during your testimony today?

MR. KOPPER: I do, and I am.

REP. GREENWOOD: And would you identify your counsel, please?

MR. KOPPER: I have Mr. Wallace Timmeny and Mr. David Howard here as my representatives.

REP. GREENWOOD: And could you, Mr. Kopper, please pull your microphone a little closer and make sure that we can hear you?

MR. KOPPER: Yes.

REP. GREENWOOD: And if your attorneys would spell their names, their last names for the record.

MR. TIMMENY: Timmeny is T-I-M-M-E-N-Y.

MR. HOWARD: And Howard is H-O-W-A-R-D.

REP. GREENWOOD: I thank the gentlemen. In that case, Mr. Fastow, would you rise and raise your right hand, and I'll swear you in? Mr. Kopper, do you swear that the testimony you are about to give is the truth, the whole truth and nothing but the truth?

MR. KOPPER: I do, so help me God.

REP. GREENWOOD: You have already indicated, Mr. Kopper, that you do not come with an opening statement. And so the chair would then recognize himself for questions. Mr. Kopper, according to the committee's investigation and the Powers report, you violated Enron's code of conduct by investing in partnerships, doing business with Enron without board approval, and corrupting others at Enron to join you in your dubious enterprises. You enriched yourself at Enron's expense to the tune of more than $10 million, and you used your power, position and influence within Enron to threaten and pressure Enron employees in an attempt to obtain favorable terms for your private partnerships. Can you sitting here under oath truly deny any of this?

MR. KOPPER: Mr. Chairman, I respectfully decline to answer the question based on my right under the Fifth Amendment to the United States Constitution not to be a witness against myself.

REP. GREENWOOD: Let me be clear, Mr. Kopper: Are you refusing to answer the question on the basis of the protections afforded to you under the Fifth Amendment to the U.S. Constitution?

MR. KOPPER: Yes, I am.

REP. GREENWOOD: Will you invoke your Fifth Amendment rights in response to all questions here today?

MR. KOPPER: Yes, I will.

REP. GREENWOOD: It is therefore the chair's intention to dismiss this witness, but the committee of course reserves all of its right to recall the witness at any time. Mr. Deutsch, would you concur in this?

REP. DEUTSCH: Yes.

REP. GREENWOOD: Okay. Mr. Kopper, you are dismissed.

MR. KOPPER: Thank you, Mr. Chairman.

REP. GREENWOOD: And the chair calls forward Mr. Richard B. Buy, chief risk officer of Enron Corporation, and Mr. Richard A. Causey, chief accounting officer, Enron Corporation. Good morning, Mr. Buy and Mr. Causey. You gentlemen are aware, I believe, that the committee is holding an investigative hearing. And, as you have heard, when doing so we have the practice of taking testimony under oath. Do either of you have any objection to testifying under oath?

MR. CAUSEY: No, sir.

MR. BUY: No.

REP. GREENWOOD: Hearing no, such response, the chair then advises you that under the rules of the House and the rules of the committee, you are entitled to be advised by counsel. Do you desire to be advised by counsel during your testimony?

MR. CAUSEY: I do.

REP. GREENWOOD: Mr. Causey, would you identify your attorney?

MR. CAUSEY: Yes, Mr. Reed Weingarten, sitting here beside me.

REP. GREENWOOD: Would you spell your last name for us, please?

MR. WEINGARTEN: W-E-I-N-G-A-R-T-E-N.

REP. GREENWOOD: Mr. Buy, do you choose to be represented by an attorney?

MR. BUY: Yes, I do.

REP. GREENWOOD: And would you identify your attorney for us, please?

MR. BUY: Mr. J.C. Nickens.

REP. GREENWOOD: Mr. Nickens, would you spell your last name, please?

MR. NICKENS: Yes, that's N-I-C-K-E-N-S.

REP. GREENWOOD: Okay. In that case, gentleman, if you would both rise I will administer the oath. Do you both swear that the testimony you are about to give is the truth, the whole truth and nothing but the truth?

MR. CAUSEY: I do.

MR. BUY: I do.

REP. GREENWOOD: You may be seated. You are both under oath. Mr. Buy, do you have an opening statement?

MR. BUY: No, I don't.

REP. GREENWOOD: Mr. Causey, do you have an opening statement?

MR. CAUSEY: Yes, sir, I do.

REP. GREENWOOD: Okay, the chair recognizes the gentleman Mr. Buy for five minutes for an opening statement.

MR. CAUSEY: Mr. Causey.

REP. GREENWOOD: I'm sorry, Mr. Causey. I apologize, Mr. Causey.

MR. CAUSEY: Mr. Chairman, members of the committee, I am appearing here today voluntarily at the request of the committee. As you may be aware, a few days ago I was advised by my Enron-provided counsel that he could no longer represent me. I immediately undertook a search for new counsel, and within the past 24 hours I retained the services of Steptoe and Johnson, and Collier and Shannon. My new counsel has been unable to provide me meaningful advice during this brief period. I therefore respectfully requested a brief delay. I was informed by the committee staff that, notwithstanding these facts, my presence today was desired by the committee. Out of respect for the committee, I voluntarily appear. However, without the benefit of meaningful opportunity to consult with counsel, I am respectfully unable to answer questions from the committee at this time. Therefore, on the advice of counsel, I will respectfully decline to answer questions of the committee. Thank you.

REP. GREENWOOD: I thank the gentleman for your statement. The chairman and the committee are disappointed that we will not be able to receive your testimony today. We know that you had prepared extensively for interviews with our staff, and we thought that would have sufficed. The facts have not changed. But we do understand the change in your legal representation, and we are pleased that you are here as well.

I am going to ask a question to both of you gentlemen. Both of you gentlemen were specifically charged by the board of directors with the responsibility to ensure that the transactions between Enron and LJM partnerships were truly arms-length transactions, beneficial to Enron and its shareholders. We now know that many of those transactions were anything but beneficial to Enron, and in fact contributed mightily to Enron's dramatic collapse. Do you believe, gentlemen, by your actions or your inactions, you failed Enron's employees and shareholders? Mr. Causey, would you respond to that question?

MR. CAUSEY: Mr. Chairman, on the advice of counsel, I will respectfully decline to answer that question.

REP. GREENWOOD: Let me be clear, Mr. Causey -- are you refusing to answer the question on the basis of the protections afforded to you under the Fifth Amendment to the U.S. Constitution?

MR. CAUSEY: Yes, sir, I am.

REP. GREENWOOD: Will you invoke your Fifth Amendment rights in response to all questions here today, Mr. Causey?

MR. CAUSEY: Yes, sir, I will.

REP. GREENWOOD: Mr. Buy, how do you respond to the question?

MR. BUY: For reasons outlined in a letter submitted to the committee last night, and on the advice of counsel, I -- I've lost my voice -- I respectfully decline to answer questions.

REP. GREENWOOD: Mr. Buy, let me be clear: Are you refusing to answer the question on the basis of the protections afforded to you under the Fifth Amendment of the U.S. Constitution?

MR. BUY: Yes.

REP. GREENWOOD: And will you invoke your Fifth Amendment rights in response to all of our questions here today, Mr. Buy?

MR. BUY: Yes, I will.

REP. GREENWOOD: In that case, it is the chairman's intention to dismiss both of these witnesses, but the committee of course reserves all of its rights to recall the witnesses at any time. Mr. Deutsch, do you concur in this decision? Gentlemen, you are and your attorneys are excused.

The chair then would call forward Mr. John Olson of Sanders, Morris, Harris, senior vice president and director of research; Mr. Thomas H. Bauer, a partner at Andersen LLP; Mr. Jeffrey McMahon, president and chief operating officer, Enron Corporation; Mr. Jordan Mintz, vice president and general counsel of corporate development.

Good morning, gentlemen. Gentlemen, I believe that you are aware that this committee is holding an investigative hearing, and that it is the practice of hearing, when holding -- this committee, when holding an investigative hearing, to take testimony under oath. Do any of you object to providing your testimony under oath?

Seeing no such objection, the chair would then advise you that under the rules of the House and the rules of this committee, you are entitled to be advised by counsel.

Do you desire to be advised by counsel during your testimony, Mr. Olson?

MR. JOHN OLSON: No.

REP. GREENWOOD: Mr. Bauer?

MR. THOMAS BAUER: Yes, I do.

REP. GREENWOOD: Would you identify your attorney, sir?

MR. BAUER: Mr. Scott Schreiber.

REP. GREENWOOD: Would you spell his last name?

MR. BAUER: S-C-H-R-E-I-B-E-R.

REP. GREENWOOD: Thank you. Mr. McMahon.

MR. JEFFREY MCMAHON: Yes, I do. And my counsel is Mr. Levy, L- E-V-Y.

REP. GREENWOOD: Thank you, sir. Mr. Mintz.

MR. JORDAN MINTZ: Mr. Chairman, also Mr. Levy is representing me.

REP. GREENWOOD: Okay. In that case, gentlemen, if you would rise and raise your right hands, I will swear you in.

Do you each swear that the testimony you are about to give is the truth, the whole truth, and nothing but the truth?

ALL: I do.

REP. GREENWOOD: You are now under oath. The chair would advise the witnesses and the audience that two votes have just been called on the floor of the House. And we know you've waited a good while already, but it will take at least 25 minutes for us to get over and make these two votes and come back, so we will adjourn -- we'll actually adjourn for 20 minutes and see if we cannot resume then.

This is hearing is suspended.

Hearing breaks and reconvenes.

REP. GREENWOOD: The committee will reconvene. Again, we thank the witnesses and apologize for the break there. There will not be any more for the afternoon, so we won't have those interruptions.

Mr. Olson, you are recognized for five minutes for your opening statement, sir.

MR. OLSON: Thank you very much, Mr. Chairman and members of the committee.

REP. DEGETTE (?): Excuse me, we can't see anything. Please sit down. Thank you.

MR. OLSON: I am a securities analyst from Houston, Texas, and I've been covering Enron since it was before Enron. I've had the distinction, I guess, of not having recommended it for the last 10- plus years, until the very end, when the company was sinking fast.

Thank you for the opportunity to discuss some very, very important credibility issues for Wall Street and the American public, which have been created by the collapse of Enron. I will be mercifully brief.

There has been tremendous collateral damage in the capital markets since Enron went down two months ago. It is still ongoing. You can help bring it to a stop. Your own confidence in the investing process must have already been sorely tested after all that you have heard. I hope my comments can provide a securities analyst's perspective on what went wrong and how we could fix it. With the help, perhaps, of 20/20 hindsight, let me try to answer.

Enron was good at some things, but it was great at gaming the system. It gamed us on Wall Street. It may have gamed its auditors and outside counsel, but it also seems some insiders were gaming Enron proper and they were gaming each other. The Wall Street gaming was principally from the partnerships or the special purpose entities. They involved marketing marginal assets with marginal accounting and marginal financial structures. All of these involved bankers, rating agencies and private placement people. What they did not involve, I might point out, were stock analysts like myself. We never saw or were never even aware of these deals. They were considered confidential or privileged by Enron, and obviously for Enron's particular reasons.

If you had asked me how many partnerships Enron had last October before this situation blew up, I would have told you maybe five or so -- I mean, just what they had disclosed in the annual report. Not hundreds, not thousands -- no one's quite sure of just what the number came to be. All of this was happening in something of a parallel universe. The revelations about these deals were what sank the Enron ship. Phony earnings and phony equity absolutely destroyed all investor confidence in a stock which had risen 40 percent annually for the last five years. Portfolio managers had loved the stock -- didn't like it, loved the stock. Despite numerous blunders and diversifications fiascos, it didn't matter, the stock was going up 40 percent a year. It was a tide lifting all the boats.

Then disaster struck. The wheels fell off in mid-October and in only six weeks time, the company was gone. It took long-term capital management five weeks. Where were the analysts then and were they compromised? Yes and no. Let me explain. Enron paid out lots of investment banking fees. The bankers loved Enron. Enron loved analysts' strong buy recommendations. Guess what happened? It got them. Lots of them. This is an abuse.

When the worm turned and Enron's stock price fell from 90 to 80 to 50 to 20 to 10 to 5 and so forth all the way down to zero, the opinions didn't really change until the very -- the bitter end. You know, analysts are typically smart people. My competitors especially are a lot smarter than I am. They can get out of the way of a freight train -- and this was a freight train. They didn't. Why not? I think it was the culture that was developed over the -- what I called the crescendo phase of the bull market over the last five years where again investment banking had a major influence in research.

Ladies and gentlemen, if you want to restore confidence in this system and restore the integrity of research to where it belongs, then you need to take away some of the marbles here. We will not miss them. In my filed testimony, I urged you to sharply restrict flaking accounting for energy contracts like mark-to-market accounting or fair value accounting for marginal assets. These do not pass the laugh test on Wall Street any more. You get no credit for them at all. I would urge you to consider de-leveraging these special purpose entities out there from their very absurd levels right not. This is clearly an abuse out there. Enron's deals were basically very shaky LBOs that were done at the equity investors' risk position. They were recourse to the parent there. And I would also urge you to review and reform the very highly compromised investment banking research conflicts, which have had such tragic investing consequences with not only Enron but in the stock market at large.

Thank you very much.

REP. GREENWOOD: The chair thanks the gentleman for your very excellent testimony.

Before I recognize Mr. Bauer, I want to inform the subcommittee of some important matters relating to his testimony. First, Mr. Bauer is here to discuss his knowledge of and involvement in the Chewco transaction for which he served as the principal Andersen audit partner. He was not involved in the LJM transactions, which are the foci of our investigation today, and thus he is not in the position to answer questions relating to those transactions on behalf of Andersen. Accordingly, I would encourage members to keep their questions to Mr. Bauer focused on Chewco rather than on LJM or any other broader accounting issues or policies that I know the members would like to ask about. We will address those issues at a later hearing.

Second, Mr. Bauer has cooperated fully and voluntarily with this committee with respect to the provision of documents and was interviewed by committee staff for more than three hours. Mr. Bauer is here pursuant to subpoena, however, because he is not in a position -- however, because he is not in a position to voluntarily testify about matters related to his client Enron without its consent.

We welcome him today and we thank him for his testimony. With that, Mr. Bauer, I will now recognize you for five minutes for an opening statement, sir.

MR. BAUER: Thank you, Mr. Chairman. Good morning Chairman Greenwood, Representative Deutsch, Chairman Tauzin, Representative Dingell, and members of the subcommittee and full committee. I am Tom Bauer. I am a partner at Andersen, where I have worked since 1974. I am appearing today at the request of this subcommittee to discuss the accounting issues associated with the Chewco transaction.

It recently has become clear that in 1997, when the Chewco transaction was conceived, Enron withheld information from me and misled me on the accounting issues related to Chewco. I knew nothing of this at the time. I was told that I had been provided with all relevant documentation in Enron's possession. Had the information that was withheld been timely provided to me in 1997 when I requested it, the accounting advice and opinion of Andersen would have been different. Let me describe the background.

In 1993, an Enron subsidiary and CalPers for the investment partnership known as JEDI. Because JEDI was a 50-50 partnership between Enron and CalPers, Enron appropriately did not consolidate JEDI for financial reporting purposes. In late 1997, Ben Glisson of Enron contacted me to discuss the accounting for a transaction that Enron was entering into. Mr. Glisson is an able accountant, who at the time was fairly familiar with the accounting rules governing special purpose entities. He told me CalPers' limited partnerships interest in JEDI would be acquired by an entity called Chewco Investments LLP. In our discussion, Mr. Glisson told me that Chewco would be structured as a special purpose entity so that it would qualify for non-consolidation. Mr. Glisson also told me that an Enron employee, who I later learned was Michael Kopper, would have a very small interest in Chewco. I reminded Mr. Glisson that for Chewco to qualify for non-consolidation as he proposed, two tests had to be met. First, at least three percent of its capitalization had to be at risk and attributable to entities independent of Enron. Second, neither Enron nor a related party of Enron, such as an employee, could control Chewco. Mr. Glisson assured me that Chewco would have three percent independent equity and would not be controlled by Enron or an Enron employee.

As the transaction unfolded, Mr. Glisson told me that Chewco's independent equity would come from two sources. First, he said that a large financial institution, independent of Enron, would make a large equity contribution. I later understood this was Barclays. According to Mr. Glisson, second component of Chewco's third-party equity would come from wealthy individual investors, who with the exception of Mr. Kopper, would be independent of Enron.