JEFFREY SKILLING AND ENRON’S PARTNERSHIPS. Enron moved into the fast lane after Jeffrey K. Skilling who arrived at Enron in 1990 from the consulting group McKinsey & Company. A decade later, he was named chief executive and resigned six months later in August 2001. Skilling encouraged workers to operate in the fast lane. Skilling overhauled the “company culture,” as reported in the Los Angeles Times (January 27, 2002).

Some employees described Enron as a place where ideas were implemented fast. But if the results were unfavorable, the project would terminate quickly. Skilling gave them more latitude by “encouraging them to push the edge of every rule, even without their supervisors’ knowledge.” He instituted a company-wide performance review system designed to displace the weak. He rewarded those workers who did well. (Los Angeles Times, January 27, 2002)

Louise Kitchen, a British trader, spearheaded a plan for Enron’s online trading operation. Online trading was seen as Enron’s future, but Skilling was opposed to automated trading systems. Under Skilling, Enron was “moving hard assets like power plants off its balance sheet into complex partnerships. The goal was an ‘asset light’ company that would make its money brokering contracts to provide power and other commodities.’ ”(Los Angeles Times, January 27, 2002), Enron’s earnings and revenue were inflated or illusory.

Knowing that Skilling opposed automated trading systems, Kitchen, who bootlegged $30 million in hardware from other Enron divisions and drew 380 people into the project, refused to divulge her plan. Later, the head of the London office finally introduced the subject of online trading to Skilling, who finally agreed that such a system might just work. It was a gigantic success with 65,000 natural gas, electricity, petrochemical, and other transactions in the first four months. (Los Angeles Times, January 27, 2002)

As a result of a 1993 partnership between Enron and the California Public Employees Retirement System (Calpers), the Joint Energy Development Investments (JEDI) was created with Enron and Calpers investing $250 million each. JEDI immediately began to prosper, as Enron bought and sold energy stocks, power plants, and other investments. That earned a 23 percent annual return for Calpers. In 1997, Enron and JEDI II set aside $500 million, and Calpers elected to cash in its JEDI I stake at $383 million. Enron then began looking for another partner to kick in $383 million to take Calpers’s place. That would keep JEDI I off Enron’s balance sheet and its profit-and-loss statement. Making JEDI I part of Enron would have cut the company’s reported profits sharply, and increased its reported debt by more than $500 million. (Newsweek, January 21, 2002)

The Raptor partnerships were created to “hedge” or protect gains Enron had made in investments in high-tech start-up companies. The Raptors were the primary tactic Enron used to inflate its profit by $1 billion in the 15 months before its collapse in late 2001. An investigative report by the special Enron board committee concluded that the partnerships used phony hedging transactions that did not transfer risk to an outside party.

Enron’s plan was to use the partnerships to enter hedging contracts, protecting the value of its investments in several start-up companies whose stock rose in the stock market boom of the late 1990s. Enron funded three of the partnerships with its own stock, putting its shareholders at risk if the stock prices of the start-ups -- and Enron’s own shares -- fell, as they did in 2001.

Enron also created Chewco Investments which was a partnership comprised of Enron executives and some undisclosed outsiders. Not having liquid cash, Chewco received a loan from Enron for $132 million and guaranteed a $240 million loan for the new partner. This left about $11.5 million for Chewco to raise. That amount was 3 percent of Chewco’s capital. That meant that since outsiders put in at least 3 percent of the capital, accountants could keep the deal off Enron’s books. But Enron failed to do that. The corporate giant provided collateral for about half of Chewco’s $11.5 million investment. This meant Chewco had only about 1.5 percent at risk, not 3 percent. So JEDI and Chewco should have been treated as part of Enron by Arthur Andersen since late 1997 on. Arthur Andersen failed to do just that. The accounting firm’s chief executive, Joseph Berardino, admitted to a congressional committee in December 20001 that the accounting was wrong. (Newsweek, January 21, 2002)

However, Berardino maintained that it was not the fault of Arthur Andersen, since no one told his firm about the collateral Enron had provided. What Berardino failed to say was that even if Chewco had met the 3 percent rule, the result would still be outrageously misleading. According to Newsweek, keeping JEDI and Chewco off the books inflated Enron’s 1997 profits by 75 percent. This move inflated profits for three more years, for a total of $396 million. (Newsweek, January 21, 2002)

Records showed that some senior Enron executives sold $44 million in company stock, while concerns were growing inside the company that losses coming from four Raptor partnerships would be made public. When the huge investment losses by the partnerships were made public months later in October, Enron officials conceded that they had overstated the value of the company by $1.2 billion, spurring the company's filing for Chapter 11 bankruptcy protection. (Los Angeles Times, February 6, 2002)

Four Enron executives -- including Chief Executive Skilling and Chief Financial Officer Andrew Fastow -- sold about $44 million in stock from August 7, 2000, when the Raptor problems became known internally, through March 26, 2001, when the partnerships were restructured to prevent disclosure of losses.

ARMY SECRETARY THOMAS WHITE. Enron moved ahead aggressively during the 1990s. Its earnings and revenue were inflated or illusory. Enron Energy Services, a major division of the corporation, overstated its profits by hundreds of millions of dollars since 1999. In 2001, senior Enron executives were warned that the division’s profits were illusory, former employees said. (New York Times, January 27, 2002)

Thomas White, who left Enron to become Bush’s secretary of the Army in June 2001, was an Enron executive for 11 years. In a disclosure last May 2001, just before he became Army secretary, White reported that he owned more than $25 million of Enron stock and would be paid $1 million in severance from Enron. But White went from the Army to Enron and back to the Army, raising concerns about potential conflicts.

White told the House Government Reform Committee in January that he had had seven meetings and 22 phone conversations with Enron executives, including one with Lay. Those talks, White said, were “personal in nature.” However, on the evening of March 22, as Congress was about to recess, White suddenly admitted that he had had an additional 44 conversations with Enron executives on his home telephone. He said these phone conversations were not necessarily personal and would have involved “some comment or discussion” relating to Enron’s financial condition. In fact, Secretary White had at least 73 conversations within 10 months of entering the Bush administration, at the very time that Enron was unraveling. (Los Angeles Times, April 4, 2002)

White has told Congressional investigators that he had six additional contacts -- beyond the seven he had already acknowledged -- with former colleagues at Enron in October 2001. During that month, he sold about $3 million of Enron stock just after the company began to imply that it might seek bankruptcy. (Washington Post, March 26, 2002)

In March 2002, White disclosed that he had retained options to buy 665,000 Enron shares until January. That prompted leaders from both parties on the Senate Armed Services Committee to suggest he violated terms of an ethics agreement in which he promised to divest himself of any stake in Enron. White did not disclose details about the options, like their expiration dates and exercise price, which could place a value on them in the time before the company collapsed. (Washington Post, March 26, 2002)

Earlier in January, White disclosed in a letter to Congressman Max Waxman that he met with or spoke by phone with Enron officials seven times last October. In addition, he said that he had 22 other contacts with Enron officials from June 7, 2001, and January 16, 2002. In that letter, White also said that he had sold $12.1 million worth of Enron stock from June 13 to October 30, 2001. Those sales included about $1.96 million worth of stock sold on October 24 and $1.11 million more sold October 30. Enron disclosed on October 22 that the SEC had begun an inquiry into the company’s finances. (Washington Post, March 26, 2002)

In a letter to Waxman on March 22, White disclosed six additional telephone conversations from his home with current or former Enron officials during October. He also said he made 49 other calls -- or attempted phone calls -- between June 20, 2001, and February 2, 2002. With the new disclosure, White had acknowledged phone calls, attempted calls, and meetings on 84 occasions from June to February. White also said in the letter that his records did not include phone calls Enron officials made to his home -- only calls that he placed. (Washington Post, March 26, 2002)

White claimed that he was unaware of a negative earnings report from the company until it was publicly released on October 16, a development that caused the stock’s value to plummet. He also said he did not know that the SEC had begun an investigation of Enron until the company disclosed it on October 22. (New York Times, March 28, 2002)

Appearing before the Senate Commerce Committee in July, White testified that he had deep regret for damage to employees and shareholders in the collapse of Enron, where he served for 11 years as an executive. But he repeatedly denied any role in manipulating California electricity prices. White told senators he shared their outrage and their desire “to hold people accountable who were responsible for it. … (It was) an absolute terrible tragedy that has occurred.” (New York Times, July 18, 2002)

White told the panel he was unaware of transactions detailed in a December 2000 Enron memo that spelled out strategies which critics say were meant to improperly take advantage of California’s power shortages.

LOU PAI Enron Energy Services (EES), created in 1997, was run by Lou Pai who competed with utilities to sell electricity and natural gas to commercial and industrial customers by taking advantage of the deregulation of electricity markets nationally. According to the New York Times (January 27, 2002), “Energy Services operated as essentially a free-standing company within the mother company, but its results were included in Enron’s financial statements. Under traditional accounting, companies book profits only as they deliver the services they have promised to customers. But EES calculated its profits in a very different way.” As soon as Energy Services signed a contract, it estimated what its profits would be over the entire term. By making its assumptions more optimistic, it could report higher profits.

In December 1998, the Pentagon issued a directive to shift control of base utilities to private hands. EES, with White’s help, won the first contract in 1999, worth $25 million over 10 years, to provide energy to Fort Hamilton in New York. Enron hired a Washington lobbyist, paying him $60,000 in 2000 to pursue military base utility privatization.

White and EES chairman Lou Pai eventually were moved aside, according to former Enron employees, in order to make way for a new management team (New York Times, January 27, 2002; Washington Post, January 27, 2002)

Pai was one of the biggest winners at Enron. He sold $270 million of Enron stock in the 16 months before he resigned in July 2001. Beginning in 1999, Pai sold $353 million in Enron stock, more than any other Enron executive. He, and possibly other partners, bought 77,000 acres of Colorado mountain land since 1999 for at least $23 million. In the spring of 2000, about the time he was going through a divorce, Pai was intent on buying a house. He told people he wanted to have a home for his son to visit during a break from college. The house he chose in the Tanglewood section of Houston had been on the market for only a day or two. He paid just over $900,000 in cash, according to a person familiar with the deal. (Washington Post, February 6, 2002)

CONTRACTS WITH PALESTINIANS. Enron’s global investments cut across all lines -- friend and foe alike. In June1999, the world’s largest energy trader announced a 20-year power-purchase agreement with the Palestine Energy Authority, a unit of Yasser Arafat’s Palestinian Authority. Enron hoped to build a 136-megawatt power plant in the Gaza Strip and help the Palestinian Authority provide a stable and reliable source of electricity for 136,000 households for the next decade.

After the United States government gained assurances that American money would not end up with terrorists, it was approved by the Overseas Private Investment Corporation (OPIC), the federal agency that supported projects abroad. The deal was signed as part of Enron's “equal” partnership with the Palestine Electric Company, a consortium of commercial and institutional investors, to build a power plant south of Gaza City. The plant would first generate power from fuel oil and then convert to a gas-fired process.

Key to the deal was political risk insurance from the OPIC, but officials there became concerned about one of Palestine Electric’s key investors, Sheik Mohammed Imran Bamieh, a prominent investor in the Saudi Binladin Group. Bamiehwas a major shareholder in the Arab Palestinian Investment Company, one of the investors with Enron in the power plant. (Washington Post, March 2, 2002)

OPIC passed on financing but did provide $22.5 million in political risk insurance. With Arafat watching, Enron officials signed the deal with the Palestinian Energy Authority and went to work on the complicated financing of what was to be the largest foreign investment ever in Gaza and the West Bank.

In late 2000, after it was supposed to begin operation, construction of the $140 million power plant just south of Gaza City was stalled. Construction was virtually halted when violence flared, after conservative Israeli leader Ariel Sharon visited the Temple Mount in Jerusalem’s Old City. Some work has since resumed, but there was no target date for the plant to open. It was another blow to Enron. (Washington Post, March 2, 2002)

IMPACT OF THE GRAMM BILL. As the 1990s rolled to an end, the Gramm bill passed Congress. Soon afterwards, a series of rolling blackouts occurred on the West Coast. There were charges that out-of-state suppliers were withholding gas and running up the price. Finally, in June 2001, public pressure forced the Federal Energy Regulatory Commission (FERC) to reassert price controls. During the energy crisis, Enron’s “wholesale services” revenues quadrupled, reaching the $48.4 billion mark in the first quarter of 2001. That gain came on top of an earlier jump in income, from $35.5 billion to $93.3 billion from 1999 to 2000. (The Village Voice, January 16, 2002)

According to the 28-page Public Citizen report, Enron was not losing money but stealing billions of dollars from California citizens while forcing on them 37 “rolling blackouts” after Senator Gramm rammed through a law that allowed Enron’s energy trading desk “to manipulate supply” secretly. Gramm’s bill was opposed by a Presidential Commission which included Treasury Secretary Robert Rubin and Federal Reserve Chairman Alan Greenspan. Enron lobbied on behalf of the bill so heavily that Washington insiders called it “the Enron point.” It had been stalled in the Senate when Gramm renamed it and tacked it to a must-sign bill in December 2000. Few noticed the new provision.

In late 2001, the FERC concluded that California electric prices were not “just and reasonable,” key wording meant to signal the price gougers that the reluctant agency might cap electric prices. (The Village Voice, January 16, 2002)

ARTHUR ANDERSEN. Arthur Andersen, the accounting firm hired by Enron at an annual fee of $25 million, first raised a red flag about the corporate giant’s fragile infrastructure as early as February 2001. Executives at Arthur Andersen discussed the company’s financial problems. Nevertheless, two months later, its auditors gave Enron’s books a clean bill of health. The February 5 meeting represented the earliest known date that senior Arthur Andersen officers -- including its head of United States operations -- knew about such issues as Enron’s aggressive deal making, internal conflicts of interest, and huge compensation packages for its senior management. The meeting, held by telephone between Chicago and the Houston branch office that handled the Enron account, was detailed in an e-mail the next day. (Los Angeles Times, January 18, 2002)

Three months later, Arthur Andersen auditors signed off on Enron’s financial statement for fiscal years 2000 and 1999, saying it “fairly represented” the company’s condition. It was not until October 16 that Enron reported serious financial losses, although Arthur Andersen had the ability to rescind its approval of the company’s financial statements at any time.

Arthur Andersen contended that it was unaware of serious problems until August. The e-mail memo reported that Arthur Andersen considered dropping Enron as a client, though it noted that the accounting firm could earn fees from Enron reaching $100 million a year. (Los Angeles Times, January 18, 2002)

Enron’s public downfall began in mid-October with the announcement of a $618 million third-quarter loss and a $1.2 billion reduction in the company’s equity. Then the partnerships that kept debt off the books were revealed. (Los Angeles Times, January 26, 2002)

Enron reported a $618-million loss and a reduction in its shareholders’ equity on October 16, and on November 8 it revised its earnings for the previous four years, although without public reference to its overwhelming debts or the financial peril it was telling Treasury officials about. In fact, Enron stock rose almost 20 percent in the four days after the November 8 disclosures as investment analysts anticipated its proposed merger with Dynegy Inc.-- later canceled -- and said most of Enron’s troubles were behind it. On December 2, Enron filed for bankruptcy, signaling the collapse of the nation’s largest corporation in history.

The Bush administration first learned of the floundering corporate giant in the fall. Enron officials made several phone calls to White House officials. The White House conceivably was in a position to warn the Securities and Exchange Commission about the company’s deterioration. But this close relationship between Enron and the Bush administration caused serious political embarrassment for the president.

In August, Enron vice president Sherron Watkins warned Lay in a seven-page letter that the energy company’s financial practices might cause it to “implode in a wave of accounting scandals.” In a letter to Lay, Watkins complained that a “veil of secrecy,” surrounding the company’s “funny accounting” of complex partnerships, had not been adequately disclosed to the public and merited further investigation. (Los Angeles Times, January 15, 2002)

In the fall, Lay called Treasury Secretary Paul O’Neill “to advise him about his concern about the obligations of Enron, whether they’d be able to meet those obligations.” Press Secretary Fleischer said that “Lay expressed to O’Neill at that time of the phone conversation his concern about the experience the company Long Term Capital had. Long Term Capital was unable to meet its obligations and headed to bankruptcy, and he wanted Secretary O’Neill to be aware of that, the Long Term Capital experience as a guide. Secretary O’Neill then contacted Undersecretary (Peter R.) Fisher. Undersecretary Fisher looked at that and concluded there would be no more impact on the overall economy.” In 1998, Long-Term Capital Management LP, one of the biggest U.S. hedge funds, almost collapsed after losing more than $4 billion in derivatives transactions. (Washington Post, January 10, 2002)

In addition, Lay had a telephone conversation with Commerce Secretary Don Evans on October 29 just prior to Enron’s collapse. Lay expressed hopes that the government would intervene with a private credit agency that was threatening to lower its rating on Enron’s debt, seriously jeopardizing the company’s financial viability. Evans said the government did not intervene. This was the first sign that White House had been informed of Enron’s desire for government intervention. (Washington Post, January 14, 2001)

Evans said he informed Chief of Staff Andrew Card of the October 29 conversation “several weeks” later, when Enron was negotiating a merger with Dynegy Inc. Evans said Card did not pass the information on to Bush, although the commerce secretary said he talked to the president in November about Enron’s plight. (Washington Post, January 10 through January 14, 2001)

In October and November, Enron President Greg Whalley made a series of six to eight calls in which he asked Peter Fisher, Treasury undersecretary for domestic finance, to help secure loans from the company's bankers. Fisher refused. On November 8, Lay telephoned Treasury Secretary Paul O’Neill to tell him of Enron’s financial crisis. Robert Rubin, head of Citigroup and a former Clinton administration Treasury secretary, also called Fisher on November 8 to suggest that Fisher take steps to prevent Enron’s credit rating from being downgraded.

That same day, Enron filed documents with the SEC revising its financial statements back to 1997, evaporating $600 million in nonexistent profits and accelerating its stock plunge. (Los Angeles Times, January 13, 2002)

To give credit to the Treasury Department, it appeared as if neither Fisher nor O’Neill asked the SEC to demand that Lay tell stakeholders and investors about the firm’s deteriorating condition. It was not disclosed how much shareholder value was lost between the time Fisher was first contacted and Enron stock plummeted. Shares dropped from $33.84 a share on October 16 to $8.41 on November 8. Company shareholders and employees lost more than $18 billion of market value in that decline. From that point, Enron stock fluctuated until the end of November, when its bonds were reduced to junk status, and the firm filed December 2 for protection from creditors under Chapter 11 bankruptcy. (Los Angeles Times, January 13, 2002)

In early January 2002, Arthur Andersen LLP disclosed that from September to November it had destroyed thousands of documents involving Enron. Two Republican House leaders, Billy Tauzin and James Greenwood, claimed that the documents were “knowingly destroyed” and asked Andersen to turn over additional records to congressional investigators. (Washington Post, January 9, 2002) Time (January 13, 2001) reported that Andersen ordered employees in an October 12 memo to destroy all Enron audit material except the most basic “work papers.”

In April, former Arthur Andersen chief auditor David Duncan pleaded guilty to illegally destroying documents back in October, two days after learning that the SEC had opened an inquiry into the crumbling finances of Enron. As the chief auditor for Enron, Duncan was in a key position to lead government investigators through the complicated off-balance-sheet partnerships – controlled by Fastow -- that concealed massive amounts of debt from Enron investors and credit-rating agencies.

Duncan told the court that he broke the law in organizing the destruction of Enron-related documents in late 2001. He said, “Documents were in fact destroyed so that they would not be available to the SEC. I also personally destroyed such document. I accept that my conduct violated federal law.” (New York Times, April 10, 2002)