Within days after Enron Corp. filed the largest bankruptcy in history, the focus of the seemingly never-ending financial nightmare shifted last week from the company’s headquarters in Houston, TX, and Wall Street to the political epicenter in Washington DC, with lawmakers on Capitol Hill quickly scheduling hearings to find out “how this happened” and the Department of Labor opening an investigation into the possible mishandling of retirement funds of Enron employees. This action comes on top of the ongoing investigation by the Securities and Exchange Commission (SEC) into the embattled energy trader.

While most of the Capitol Hill hearings are planned for early 2002, two subcommittees of the House Financial Services panel want answers from Enron and its auditors now. They have scheduled a joint hearing for Wednesday to assess the effects of the company’s financial breakdown on the nation’s commodity markets, as well as the reasons behind Enron’s overstated earnings, its potential mishandling of employee 401(k) pension plans, possible securities fraud and accounting irregularities.

The joint hearing, which promises to be the hottest ticket in town this week, will be sponsored by the Subcommittee on Capital Markets, Insurance and Government-sponsored Enterprises and the Subcommittee on Oversight and Investigations at 10 a.m. on Dec. 12. The two panels have invited the SEC Chairman Harvey Pitt, Enron CEO Kenneth Lay and Arthur Andersen CEO Joe Berardino as witnesses.

Elsewhere in Washington, Labor Secretary Elaine Chao said last week that the department has opened an investigation into Enron for potential mismanagement and abuse of the pension fund plans of existing and former company employees in the wake of the energy trader’s financial meltdown.

The House Financial Services Committee, formerly the House Banking Committee, “[has] got to move past the headlines and get the facts on Enron,” said Committee Chairman Michael G. Oxley (R-OH). The subcommittees plan to give special focus to the financial hit that Enron employees’ retirement savings took because the company overstated its earnings by $583 million for the past four years.

On average, Enron employees have more than 60% of their retirement savings wrapped up in company stock, which has fallen from the lofty level of more than $80 a year ago to 77 cents/share at mid-day Friday, according to Oxley. Department of Labor officials have said that this may be the largest loss ever sustained by a single company’s retirement fund, he said. In addition to Enron workers, millions of others who are invested indirectly through other retirement plans and mutual funds have sustained large losses.

“It looks to me like a whole bunch of innocent people got crushed here,” said Capital Markets Subcommittee Chairman Richard H. Baker (R-LA). “We need to find out whether the retirement savings of Enron workers and the mutual funds of a lot of other people were victims of fraud or any violations of existing securities laws. Do we need better disclosures or accounting standards that give investors the real picture? But what I’d like to know…is how this happened, could it have been avoided, where were the warnings from the experts, and how do we avoid a similar collapse in the future.”

The Labor Department estimated Enron employees lost 70-90% of the value of their pension benefits after the company re-stated its earnings for the past four years. Enron’s employees, who were barred by the company from selling their stock as the per-share price plunged in recent weeks, “have gotten the short end of the stick in the sudden collapse of this company, and we are committed to doing everything we can to help them,” Chao said last Wednesday.

The department’s Pension and Welfare Benefits Administration (PWBA), a quasi-federal agency, is reviewing Enron’s benefits plans, the rules that govern them, and steps that were taken by the company shortly before its collapse to temporarily freeze trading of 401(k) plan assets. This action is being closely coordinated with the ongoing SEC investigation into Enron, according to Chao. Some experts, however, question whether there is much that Labor can do to restore benefits to Enron workers.

In response to the sudden layoffs at Enron, Labor and the Texas Workforce Commission have set up rapid response teams to provide orientation sessions for the affected workers, informing them how to sign up for unemployment insurance benefits and receive free job training and other services. After filing for Chapter 11 bankruptcy, Enron laid off 4,000 employees at its Houston headquarters, and put another 3,500 on temporary leave.

Labor also has activated its toll-free hotline, (877) US2-JOBS, to take calls from laid-off Enron employees and direct them to nearby one-stop re-employment centers. In addition, Enron employees with questions about their employee benefit plans can call the PWBA’s Dallas office at (214) 767-6831, or go to https://www.dol.gov/dol/pwba.

In a related development last week, House Rep. John Dingell (D-MI) told the SEC’s Pitt that he wanted the ongoing investigation being carried out by his agency into Enron to be both “vigorous and fair,” and to explore “any and all other matters involving your former [accounting] clients,” whose interests Pitt represented for two decades as a private lawyer.

In a Dec. 5 letter to the SEC chairman, the vocal Dingell chastised Pitt for a speech he gave in October before the American Institute of Certified Public Accountants (AICPA) in which he said the SEC “has not…always been a kinder and gentler place for accountants,” and that “those days [were] ended.” Pitt represented the AICPA and the Big Five accounting firms, including Enron’s auditor Arthur Andersen, during his years in private law practice.

The Michigan Democrat said he was “deeply troubled by the tone and tenor of [Pitt’s] remarks” because it sent the “wrong message” to auditors, the SEC staff and to the investing public. “Your message appears to be that the [accounting] rules will not be implemented as vigorously as they should be. I trust that this is not what you meant to convey and that you will correct any misunderstanding…This is critical, given the plummeting confidence of investors in the integrity of financial reporting at this time.”

The lawmaker attached three pages of questions on Enron’s accounting procedures for Pitt and the SEC to “consider in the course of your investigation,” and for which “I will seek answers to at an appropriate time.”

Dingell is the ranking Democrat on the House Energy and Commerce Committee, which plans to hold hearings into the energy trader’s financial collapse early next year. Committee staff members last week met with the representatives of the SEC, Arthur Andersen, the Financial Accounting Standards Board and Enron in preparation for the hearing.

In a letter to members of Congress last week, President Skip Horvath of the Natural Gas Supply Association (NGSA) urged them to “resist the call by some to increase congressional oversight over the natural gas market” based on reports of potential irregularities at Enron. Although the “shake-up of Enron is a shock, it is not by any means a hole that will sink” the natural gas market, which Horvath said was “large and vibrant.”

Rep. Henry Waxman (D-CA) last week stepped up his call for Vice President Dick Cheney to disclose “secret contacts” that a White House task force had with Enron, a “major Republican contributor,” while drafting the national energy policy. He further indicated that Enron’s failure would take its toll on top Bush administration officials, several of whom have large holdings of the company’s stock.

“It is appropriate to ask whether Enron communicated to you [Cheney] or others affiliated with your task force information about its precarious financial position…since this information was apparently hidden from investors and the public until quite recently,” he wrote to Cheney last Tuesday. The White House task force issued the Bush administration’s national energy policy last May.

Waxman’s letter detailed the close financial ties between Enron and the Bush administration, which so far has refused to comment on the energy trader’s plight. “Enron gave over $110,000 to President Bush’s presidential campaign, making it one of the campaign’s top backers. In total, [Enron Chairman Ken] Lay and the company’s employees have donated nearly $2 million to Mr. Bush since 1993,” he said. Lay and Bush are long-time friends.

Additionally, “one of the officials who served on the task force — Lawrence Lindsay, the president’s chief economic adviser — ‘served on an Enron advisory board’ and reportedly received $50,000 last year from Enron. Several other senior White House aides apparently owned Enron stock or served as paid consultants to the company, including your own chief of staff. Senior adviser Karl Rove, who owned over $60,000 worth of Enron stock, has reportedly ‘spoken frequently about energy policy’ with Mr. Lay. U.S. Trade Representative Robert Zoellick served on Enron’s advisory council. And Secretary of the Army Thomas White, a former Enron executive, valued his company stock between $25 million and $50 million earlier this year,” Waxman told Cheney.

“Further complicating this extraordinary situation,” Waxman wrote, “is the fact that senior Enron executives were enriching themselves at the same time that Enron was lavishing large campaign contributions on President Bush and the Republican party and apparently influencing the administration’s energy policies.”

Senior Enron officials “reaped huge profits by selling company stock. [They] sold 1.8 million shares valued at about $106 million through July of this year. According to corporate filings, Mr. Lay realized $123 million in 2000 by exercising stock options. In addition Mr. Lay has cashed in shares for a further $25 million this year,” Waxman said.

“These executive windfalls contrast starkly with the devastating losses suffered by Enron’s rank-and-file employees and small investors. A recently filed class-action lawsuit indicates that Enron’s current and former employees have lost a staggering $1 billion from their 401(k) accounts in the wake of the company’s collapse,” he noted.

Cheney and the White House have refused to turn over information about the task force’s meetings and dealings to the General Accounting Office (GAO), which launched an investigation last May at the urging of Waxman and Rep. Dingell. The GAO was preparing in September to bring “possible litigation” to obtain the sought-after information, but the agency suspended its investigation in the wake of the Sept. 11 terrorist strikes.

Energy Secretary Spencer Abraham said last week he may order the Energy Information Administration (EIA) to examine the potential impact on energy markets of the collapse of Enron. However, he noted he did not think Enron’s fall would affect energy deregulation.

“Normally we wouldn’t do an analysis of a specific company,” said Jonathan Cogan, energy information specialist for the EIA, but he noted it wouldn’t be out of the ordinary for the agency to examine the implications of Enron’s financial collapse on the markets. “At this point in time, however, we have not been asked [by the secretary] to do any special analysis, nor have we initiated any internal analysis of the Enron situation,” Cogan told NGI.

Much of the activity in Washington came after Enron filed its Chapter 11 petition on Dec. 2 in the U.S. Bankruptcy Court for the Southern District of New York, with the company and 13 of its units listing $49.8 billion worth of assets and $31.2 billion worth of debts. Affiliated entities filing for bankruptcy with Enron were Enron Metals & Commodity; Enron North America Corp., Enron Power Marketing Inc.; PBOG Corp.; Smith Street Land Co.; Enron Broadband Services Inc.; Enron Energy Service Operations Inc; Enron Energy Marketing Corp.; Enron Energy Services Inc.; Enron Energy Services LLC; Enron Transportation Services Co.; BAM Leasing Co.; and ENA Asset Holdings LP.

Enron-related entities not included in the Chapter 11 filing were Northern Natural Gas Pipeline (NNG), Transwestern Pipeline, Florida Gas Transmission, EOTT, Portland General Electric and numerous other Enron international entities. Enron Canada faced bankruptcy last week after a judge in Calgary denied the company’s bid for a stay to prevent contract cancellations by Canadian marketers and producers.

The mood around Enron Houston headquarters last Monday was resolve as much as anything else, as thousands of employees prepared for the inevitable pink slips following the bankruptcy filing by what was the world’s leading energy trader just a few weeks ago. With almost 21,000 employees worldwide, Houston’s offices took the largest hit, with more than 4,000 of the 7,500 employees let go last week.

The company’s bankruptcy filing was accompanied by a $10 billion lawsuit against Dynegy Inc. for breach of contract for pulling out of the planned merger with Enron (see related story).

Along with its bankruptcy petition, Enron issued a press release last week that it was in active discussions with various leading financial institutions to provide credit support for, recapitalize and revitalize that business under a new ownership structure. Enron would continue to have a significant ownership share and provide it with traders, back office capabilities and technology from its North American wholesale energy business. The new entity would conduct counterparty transactions through EnronOnline. Any such arrangement would be subject to the approval of the Bankruptcy Court.

“If these discussions are successful, they could result in the creation of a new trading entity with a strong and unencumbered balance sheet, the industry’s finest trading team, and its leading technology platform, all backed by one or more of the world’s leading financial institutions,” said Enron COO Greg Whalley. “We understand that it may take time for counterparties to resume normal trading levels with this entity, but we are confident that this business can be put back on a solid footing. Obviously, our potential partners share our confidence or they would not be at the table with us. We intend to take steps to retain employees who are key to the future success of our wholesale energy trading business and to regain the support and confidence of its trading counterparties.”

Enron last week obtained $1.5 billion in Chapter 11 financing to keep its energy trading unit and other operations running as it began to reorganize. A bank consortium, led by J.P. Morgan Chase & Co. and Citibank, loaned the bankrupt Houston trader the funds, which will give Enron some capital as it attempts to repay some debts. Enron also got a go-ahead from the Bankruptcy Court last week that allowed it to continue operations and offer severance packages to the thousands of employees who are losing their jobs.

U.S. Bankruptcy Court Judge Arthur Gonzalez of the Manhattan, NY, court gave Enron the green light to draw $250 million from the new credit line and scheduled a hearing for Jan. 7 to consider giving it full access to the money. An attorney representing Enron at the hearing in New York said Enron only had $500 million to operate as of last Monday. Once it has access to the funds, Enron would use $550 million to repay a $550 million debt owned by Transwestern Pipeline, according to J.P. Morgan Chase. When Transwestern’s debt is repaid, it likely also will file for bankruptcy. Other units were expected to file for bankruptcy “in the days ahead,” said Enron attorney Martin Bienenstock.

In the New York court, Enron’s attorney said that Enron’s trading book had carried a value of $12 billion until mid-October, when the company filed its third-quarter earnings. The earnings release, and subsequent disclosures of writedowns and dubious related-party transactions precipitated the incredible fall in Enron’s shares and ultimate bankruptcy (see NGI, Oct. 22). Ironically, Enron’s per share value, which opened last week at 26 cents, rose in value in the days following the company’s bankruptcy filing, exceeding the $1 mark, but then began to retreat later in the week. It was at 77 cents/share at mid-day Friday.

Gonzalez gave permission for Enron to begin releasing employee severance packages, with a minimum of $4,500 to about $15,000. He also allowed Enron to complete its construction of a $40 million office tower in downtown Houston, which is nearly done, and spend another $8 million for Internet access and office expenses.

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