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Questions Were Answered at Board's InvestigationBy:
Kurt Eichenwald
Kenneth L. Lay has not always been
silent about what he knew of the debacle at the Enron Corporation. Just four weeks before his decision to decline to testify before a Senate committee investigating the Enron collapse, citing his Fifth Amendment right against self-incrimination, Mr. Lay, the company's former chairman and chief executive, answered questions from lawyers for the special committee of the board investigating partnerships that ultimately brought the company to its knees. In the interview, according to a Jan. 16 memorandum detailing his statements, Mr. Lay described the inner working of the board in approving the partnerships; the role of Andrew S. Fastow, Enron's former chief financial officer, in the dealings; and the repeated withholdings of relevant facts from the directors by senior managers with financial interests in the partnerships. What Mr. Lay described was a company where almost no one at the top paid much attention to the complex financial transactions that drove Enron's earnings. Indeed, in his interview, Mr. Lay said that no one on the board gave much thought to the amount of compensation Mr. Fastow was receiving from a partnership known as LJM because of assurances from him that he was spending only a few hours a week on the business of those entities. Mr. Fastow ultimately was found to have received at least $30 million from the partnership. "The board and Lay trusted him and could not imagine that he was making a substantial sum of money from his LJM involvement," the memorandum summarizes Mr. Lay as having said. Mr. Lay presented himself as having little knowledge of either accounting or the complex financial transactions that had become the driving force of his company's performance. His accounting background, according to the memorandum, was limited to 12 hours of classes in college and general knowledge he had picked up. The concept of the partnerships for off-balance-sheet transactions, a financing technique that allowed Enron to shift assets and liabilities off its books, began as a way to try to satisfy Wall Street's desire for ever- increasing earnings, the memorandum quotes Mr. Lay as saying. "Enron utilized off-balance-sheet transactions because the company was growing quickly and the balance sheet was not large enough to handle the growth," the memorandum says. "Enron could either significantly decrease the growth rate or continue to grow rapidly by utilizing off-balance- sheet transactions." Yet the execution of those transactions appears to have been done with little actual oversight. For example, according to the memorandum, when the company decided it needed to create a hedge for an investment in a technology company, it rushed to set up a Fastow partnership. "No efforts were made to find a commercial third party because the market was moving quickly and the hedge had to be put in place in a timely manner," the memorandum quotes Mr. Lay as saying. "There was no time to find a third party." Mr. Lay also said that he was unaware of payments to a partnership owned by Mr. Fastow and other Enron executives, which earned those officials millions of dollars in profits in a matter of weeks. The board was presented details about the partnerships and was concerned enough about having the chief financial officer run them to demand that stringent controls be put in place to ensure that conflicts of interest not harm the company. Yet, according to the memorandum, Mr. Lay made little effort to ensure that those instructions were followed. "Lay never reached out on his own to investigate whether the controls the board put in place to ensure arms-lengths transactions were followed," the memorandum states. It also says that after Mr. Lay received a letter from Sherron S. Watkins, an Enron employee, about possible accounting problems with the partnerships, Mr. Fastow began to attack her motives. Mr. Fastow "told Lay that he was concerned that Watkins was causing problems and possibly motivated to get a severance package," the memorandum states. "Lay thought that Watkins was sincere and credible," it states. FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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