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Enron Lawyer Says Company Ignored Alarm

By: Susan Schmidt and Peter Behr
The Washington Post, February 7, 2002

A senior Enron Corp. lawyer raised red flags more than a year ago about the corporation's approval of supposedly arm's-length deals with partnerships managed by Enron insiders, new documents show. He has told House investigators he was rebuffed.

The lawyer, Jordan Mintz, also tried unsuccessfully last May to get then-Enron chief executive Jeffrey K. Skilling to sign a series of approval sheets on investments the Houston energy trader made with the partnerships in 2000.

Skilling, who is to testify today before Congress, is the most senior Enron executive to be questioned about his role in the nation's largest corporate bankruptcy, which cost shareholders and employees billions of dollars. Former chairman Kenneth L. Lay declined to testify before a Senate committee earlier this week.

The drama of Skilling's appearance is expected to be prefaced by a parade of current and former Enron executives, including Andrew S. Fastow, who was chief financial officer, and Michael Kopper, invoking their Fifth Amendment protection against self-incrimination.

Fastow and Kopper, who collected more than $40 million from the off-the-books partnerships, were accused of enriching themselves at the company's expense in a report released Saturday by a special committee of the Enron board of directors. Enron's collapse was triggered by losses attributed to the partnerships they ran.

Members of a House Energy and Commerce subcommittee are expected to question Mintz and Skilling about Mintz's memos, which were obtained by investigators for the panel.

Rep. James C. Greenwood (R-Pa.), chairman of the oversight and investigations subcommittee, said last night that the Mintz memos tell more about the thinking of senior Enron executives than the scathing internal report a special committee of Enron's board of directors issued over the weekend. "I think this goes to state of mind," he said.

Richard A. Causey, Enron's chief accounting officer, and Richard B. Buy, its chief risk officer, also are expected to take the Fifth Amendment, Greenwood said. Enron spokesman Mark Palmer said yesterday: "I know right now they are still employees of Enron. That doesn't sound real strong, but that's where we are."

When Enron's board approved waiving the company's ethics code to allow Fastow to run the partnerships, it set up an elaborate approval procedure designed to facilitate oversight of his activities. But the special board's report, led by new outside director William C. Powers Jr., said the procedures weren't followed.

Mintz raised concerns about the partnerships that Fastow ran in December 2000 in a memo to Causey and Buy about a proposed new entity called LJM3, which was never formed. In another memo to the same two officials last March, he recommended changes in the approval process for deals between Enron and existing LJM partnerships.

Mintz said he was worried about whether the huge financial transactions were fair to Enron or might be considered "sweetheart" deals favoring Fastow. Enron's official justification for the deals is "self-serving," Mintz said in one memo. After an internal investigation, Enron disclosed in November that Fastow had received at least $30 million in partnership fees and profits.

In May of last year, Mintz reminded Skilling that his signature of approval was called for on the partnership deals. Skilling failed to sign all but one of the partnership agreements sent to him, the Powers report said.

"It appears that Skilling did not want his fingerprints on any of the partnerships," said Ken Johnson, a subcommittee spokesman.

Also scheduled to testify today are two Enron board members, the company's current president, Jeffrey McMahon, who had challenged the propriety of the Fastow partnerships, and an Arthur Andersen accountant who worked on the deals.

Andersen was heavily criticized in the special board report, and its lead Enron auditor, David B. Duncan, took the Fifth Amendment at an earlier subcommittee hearing. He was fired by Andersen for shredding documents related to the Enron audit.

Mintz raised concerns about the partnerships at other points, according to the Powers report and congressional investigators. Mintz last spring consulted an outside law firm, Fried Frank Harris Shriver & Jacobson, to review the off-the-books entities.

Skilling spent a decade at Enron helping transform it from an energy company into the world's largest energy-trading company. He sold Enron stock last year worth $30 million, and previously had sold about $70 million more.

He has said he was stunned to learn last fall that Fastow had made $30 million in his dealings with the partnerships.

Subcommittee members may also ask Skilling about why Fastow sold his shares of the partnerships last July to Kopper and about his own resignation in August. Days after Skilling left, Enron employee Sherron Watkins went to Chairman Kenneth L. Lay, warning that the Fastow partnerships could set off "a wave of accounting scandals" that could swamp Enron.

House members also are likely to want to know from Skilling why Enron's Energy Services division was reorganized last spring. There have been allegations, which the company denies, that the merger of the retail business with a wholesale energy business hid more than $300 million in losses.

McMahon, Enron's current president, relinquished the post of treasurer in 2000 after, he says, Skilling rebuffed concerns that he raised about the Fastow partnerships.

McMahon had been involved in partnership negotiations that resulted in a $10.5 million windfall to Kopper and his domestic partner, William Dodson. The Powers report said McMahon told Fastow the huge payment was inappropriate but was informed that Skilling, the CEO, had authorized it.

"McMahon said he wasn't going to be comfortable being treasurer with the conflicts put in place having Fastow serving a dual role," Enron spokesman Palmer said. "He was very critical of that."

One of the board members invited to testify today is Herbert S. Winokur Jr. He was the only holdover director of the three charged with preparing the special report on Enron's collapse.

He is likely to be asked about his role, as a member of the board's finance committee, in recommending Fastow's LJM2 partnership plan in 1999 as a means to gain equity and manage risk. He also made the motion that waived the conflict-of-interest policy for Fastow.

Fastow's lawyer, John Keker, has complained to the House subcommittee about its insistence that his client appear in person to assert his constitutional right not to testify.

"Forcing Mr. Fastow to present himself as fodder for this degrading spectacle will serve only to destroy his reputation and ultimately to interfere with his right to receive a fair trial in the event that any of the scurrilous accusations presently being leveled against him ever ripens into a charge to which he can respond in a court of law," Keker wrote the committee.

Greenwood responded that, given the huge impact of the Enron failure, he does not want to make it easy for people to simply have their lawyers "fax in a statement saying they are taking the Fifth."

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