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The GW Hatchet

Serving the GW Community since 1904

The GW Hatchet

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Officials name senior vice president, chief of staff
By Fiona Riley, Assistant News Editor • March 26, 2024

Enron execs knew of financial troubles, says letter

Posted 10:20 p.m. Jan. 16

By Patrick W. Higgins
U-WIRE Washington Bureau

(U-WIRE) WASHINGTON – Enron executives were aware of their company’s financial problems and of falsified accounting records three months before they filed for bankruptcy, according to a letter released this week by a congressional committee. Top Enron officials are also under investigation for allegedly dumping $1.1 billion in stock before the company went bankrupt.

Enron CEO Kenneth Lay received a seven-page letter from senior employee Sherron S. Watkins outlining the imminent demise of the company and citing, “We are under too much scrutiny and there are probably one or two disgruntled ‘redeployed’ employees who know enough about the ‘funny’ accounting to get us in trouble.” The House Energy and Commerce Committee released the letter Monday.

The letter was sent to Lay sometime in late August, following the unexpected resignation of former CEO Jeffrey Skilling. Several weeks later, Watkins was asked to resign.

In a memo in August, Lay told employees he had “never felt better about the prospects of the company.” He continued, “Our growth has never been more certain,” despite tumbling stock prices and the information he received from Ms. Watkins.

Enron filed for Chapter 11 bankruptcy protection Dec. 2, after admitting that the corporation overstated its profits by more than $600 million for the third quarter. As a result, 4,000 employees lost their jobs and many lost their retirement 401(K) funds, which were mainly invested in Enron stock that continues to take losses in Wall Street. Enron stock, which at its height sold for $83 a share, was reduced to less than $1 before the New York Stock exchange suspended trading of the stock this week.

The Justice Department, Labor Department and at least five congressional committees are investigating if Enron executives knew of company’s financial woes and continued to promote the stock to both employees and Wall Street. From 1999 to 2001, Enron executives sold a collective $1.1 billion worth of company stock, and froze employee’s ability to sell, Enron employees testified before the Commerce Committee last week.

Arthur Andersen, the New York-based accounting firm that handled the auditing of Enron, admitted to destroying documents related to the case in response to a congressional subpoena. There is no law on how long documents must be retained in an accounting firm.

“This is a deeply troubling development. It should never have happened,” Rep. W.J. Billy Tauzin (R-La.), Chairman of the Commerce Committee said in a statement last week. “While Andersen has assured the committee that it will work vigorously to retrieve all electronic documents, we may never know if all of the relevant records were recovered.”

The investigation may prove more difficult than most as politicians attempt to avoid conflict of interest with a company with extensive political donations. According to the Center for Responsive Politics, Enron donated more than $5.7 million to lawmakers since 1989, with 73 percent of the contributions to Republicans. According to the Federal Elections Committee (FEC), Enron, and specifically Kenneth Lay, was one of President Bush’s top contributors for the 2000 election and inauguration, as has been the single largest donor to Bush in his entire career.

Enron’s reach is so extensive that the entire U.S. Attorney’s Office in Texas has recused itself from the criminal investigation of the Houston-based energy-trading giant, as did Attorney General Ashcroft, who received $57,499 from the company for his 2000 Senate campaign.

The Bush administration came under scrutiny last week as Commerce Secretary Don Evans and Treasury Secretary Paul O’Neill admitted to having phone contact with Lay numerous times in late October and early November. Despite initial conflicting stories, both men have claimed that Lay asked for the government’s help in influencing banks on Enron’s behalf, a request both men said they denied.

In defense of the cabinet members, White House Press Secretary Ari Fleischer said, “What you have here is a case where a contributor called up and asked for something but did not get it.”

The bulk of the federal investigation will focus on the crime of securities fraud, which stipulates that, in this case, Enron executives must have had willful intent to deceive their employees and the public about the health of company stock.

According to Arthur Wilmarth, a professor of law at the George Washington University, additional crimes such as conspiracy and federal wire fraud are possibilities for executives of Enron and Arthur Andersen.
Wilmarth said, “It raises some very troubling questions about fairly complicated issues of permissible accounting practices.”

In the worst case, people could go to prison and pay very high fines. “There is question about what Enron told the employees and the investing public,” Wilmarth said. “It certainly looks as if there is smoke; whether there is fire remains to be seen.”

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