Former Enron Chairman Kenneth Lay canceled his much-awaited appearances before Senate and House subcommittees this week in the wake of a blistering internal company report that said Lay, as well as other senior management officials, the board of directors and the company’s outside auditor, contributed to the financial collapse of the once-powerful energy trader last fall. Both congressional panels are now considering issuing subpoenas for Lay to testify at a later date.

In the wake of the report, Lay resigned Monday from Enron’s board of directors, effectively severing all his ties to the Houston company in which he had been the driving force for the past 16 years..”I want to see Enron survive and successfully emerge from reorganization,” he said in a prepared statement. “Due to the multiple inquiries and investigations, some of which are focused on me personally, I believe that my involvement has become a distraction to achieving this goal.”

Lay was Enron’s CEO, chairman and board member since 1986, dropping the CEO title for a brief period early last year. He resigned as chairman and CEO of Enron last month.

Responding to the scathing report, which was issued Saturday by a special investigative committee of Enron’s board of directors, House Energy and Commerce Committee Chairman W.J. “Billy” Tauzin (R-LA) said the case against Enron “may clearly end up being [securities] fraud.” He suggested that “maybe somebody ought to go to the pokey for this” during an interview on NBC’s Meet the Press on Sunday.

The report found that Enron “officers — all the way to the board of directors — have some responsibility. In fact, the report even targets Ken Lay. [It] said he had a responsibility as supervisor of these offices to know what was going on,” Tauzin said. The blame for the company’s failure “goes all the way to the top.”

The internal document “suggests massive problems” existed at Enron, Sen. Byron Dorgan (D-ND) also said on Meet the Press, adding that the energy trader encouraged “almost a culture of corporate corruption.” Dorgan was to chair a Senate Commerce subcommittee hearing at which Lay was scheduled to testify Monday.

“Clearly, some things have happened here that are going to put some people in real jeopardy and trouble,” he said, when asked if his panel had uncovered any evidence of criminal behavior. He noted the special investigative report estimated $1 billion in profit “was booked…that didn’t exist” by Enron over the past 15 year years.

These “particularly disturbing” and “inflammatory” statements made by key congressional investigators looking into the Enron affair “show that judgments have been reached and the tenor of the hearing will be prosecutorial” if Lay were to appear, said Lay attorney Earl J. Silbert, in a letter informing Dorgan’s subcommittee that his client would not testify. Silbert, who served as a Justice Department prosecutor during the Watergate era, faxed the letter to both the Senate and House panels late Sunday night. Lay also was scheduled to appear Tuesday before a House Financial Services subcommittee.

The full Senate Commerce Committee will meet early Tuesday to vote on whether to subpoena Lay to appear before Congress, a spokesman said. The House Financial Services subcommittee on capital markets gave Chairman Richard H. Baker (R-LA) and its ranking member the authority to issue a subpoena for Lay’s appearance at a later date, if warranted.

The exhaustive, 218-report, which has stirred considerable controversy, said all of the major players — Lay, former CEO Jeffrey Skilling, ex-CFO Andrew Fastow, the board of directors, and Enron outside auditor Arthur Andersen LLP — either directly or indirectly had a hand in the breakdown of the company and its ultimate descent into bankruptcy in early December, which put thousands of Enron employees out of work, and robbed employees and investors of billions of dollars in stock value.

Known as the “Powers Report,” because the investigation was led by University of Texas Law School Dean William Powers, the report concludes that not only top Enron executives, but others under Fastow’s jurisdiction and members of Fastow’s family, enriched themselves at Enron — and Enron shareholders’ — expense. Besides Powers, other board members contributing to the investigation and the report were Enron board members Raymond S. Troubh and Herbert S. Winokur Jr.

“We had no power to compel third parties to submit to interviews, produce documents or otherwise provide information,” said the Powers Report. “Certain former Enron employees who (we were told) played substantial roles in one or more of the transactions under investigation — including Fastow, Michael J. Kopper, and Ben F. Glisan Jr. — declined to be interviewed either entirely or with respect to most issues. We have had only limited access to certain workpapers of Arthur Andersen LLP…and no access to materials in the possession of the Fastow partnerships or their limited partners.”

The report does not conclude, but hints, that laws may have been broken by some Enron employees. “Our investigation identified significant problems beyond those Enron has already disclosed,” according to the report. “Enron employees involved in the partnerships were enriched, in the aggregate, by tens of millions of dollars they should never have received — Fastow by at least $30 million, Kopper by at least $10 million, two others by $1 million each, and still two more by amounts we believe were at least in the hundreds of thousands of dollars. We have seen no evidence that any of these employees, except Fastow, obtained the permission required by Enron’s Code of Conduct of Business Affairs to own interests in the partnerships. Moreover, the extent of Fastow’s ownership and financial windfall was inconsistent with his representations to Enron’s Board of Directors.

“This personal enrichment of Enron employees, however, was merely one aspect of a deeper and more serious problem. These partnerships — Chewco, LJM1 and LJM2 — were used by Enron management to enter into transactions that it could not, or would not, do with unrelated commercial entities. Many of the most significant transactions apparently were designed to accomplish favorable financial statement results, not to achieve bona fide economic objectives or to transfer risk.” Some transactions, said the report, did not follow applicable accounting rules.

The way transactions were implemented “allowed Enron to conceal from the market very large losses resulting from Enron’s merchant investments by creating an appearance that those investments were hedged — that is, that a third party was obligated to pay Enron the amount of those losses — when in fact that third party was simply an entity in which only Enron had a substantial economic stake. We believe these transactions resulted in Enron reporting earnings from the third quarter of 2000 through the third quarter of 2001 that were almost $1 billion higher than should have been reported.”

The entire report is available for review on the web site of the U.S. Bankruptcy Court of New York at www.nysb.uscourts.gov/.

The Enron committee document is a “good first step,” said Tauzin, adding that “it tracks very clearly with [what] we’re finding in our investigation that not only were there corrupt practices,” such as the hiding of corporate debt and the posting of non-existent profits, but “I think we’re finding what may clearly end up being [securities] fraud.”

Dorgan said Sunday that he had hoped to focus on the more than 3,000 off-the-book partnerships when Lay came before the Senate Commerce panel. “We need to understand who invested [in] those partnerships. Who were invited to invested in those partnerships?…Frankly, we’re getting almost none of that information at this point from the corporation.”

Committee members “want to know what Ken Lay knew” about the partnerships, he noted, adding that “once your start peeling away the layers of this onion, it gets pretty ugly in there.”

While Tauzin’s committee has “hammered” away at Enron and Arthur Andersen during the past couple of weeks, Tauzin said these were just “sideshows.” The “true show” will come later this week when Skilling and Fastow come before the House energy panel, he noted. Skilling has agreed to testify Thursday, while Fastow has said he will invoke his constitutional right not to incriminate himself.

Enron attorney Jordan Mintz, who Tauzin called “one of the good guys,” will testify that he “actually went to Skilling, and brought him all of these deals to get his signature on them,” but Skilling refused, Tauzin said. “What does that say about his knowledge [of] whether these deals were honest or corrupt?”

Mintz reportedly hired the New York law firm of Fried, Frank, Harris, Shriver & Jacobson to review the legality of the controversial Enron partnerships when he joined the company in October 2000, and was told that Enron should halt its practice immediately. Mintz informed Enron “senior officials that all of this was phony, that something was wrong,” Tauzin said, but his warnings were ignored.

In addition to Dorgan’s and Tauzin’s committees, the Enron financial nightmare is being investigated by the departments of Justice and Labor, the Securities and Exchange Commission (SEC) and a slew of other congressional committees. The Justice Department will determine whether any criminal charges are brought against Enron and Arthur Andersen officials.

Tauzin said a key goal of his committee’s investigation is to find out whether current accounting standards are “good enough” and were “simply violated” by Enron and/or Arthur Andersen, or whether beefed-up standards are warranted. The report by the Enron special committee suggested that “most of this was just violation of current standards.”

Few believe that Tauzin, who BusinessWeek has reported received $57,000 in campaign contributions from Arthur Andersen over 12 years, can objectively evaluate the auditor’s culpability in the unfolding Enron scandal. Tauzin was one of several lawmakers who blocked an attempt by the SEC more than a year ago to prevent auditors from providing consulting services to their accounting clients, a move that many believe would have mitigated, if not averted, the Enron debacle.

Both Dorgan and Tauzin believe the Bush administration, which was instructed late Friday to preserve all documents related to Enron, will eventually make public all records pertaining to Vice President Dick Cheney’s task force that developed the national energy policy last year.

“I think [the records] should be turned over. This is a circumstance where a task force was created, public funds were expended,” Dorgan said. The General Accounting Office (GAO), which is seeking the records on behalf of members of Congress, “[is] not asking for details about what the recommendations were, but who were members of the task force, when did it meet and so on.”

The White House is concerned about its right to obtain “confidential advice” when developing policy, and while there is “some logic in defending that proposition legally,” Tauzin said he believes the administration will provide the sought-after records “simply as a political matter.” He added “it’s the right thing to do.”

The GAO alerted President Bush and Cheney last week of its plans to file a lawsuit in federal court within the next few weeks to gain access to the energy task force records.

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