Risk & Compliance

Grilling Skilling, Take Two

Former Enron CEO says he didn't dupe anyone; also says he can't recall $5 million bonus. Plus: Who's firing Andersen now, and how did the auditor g...
Stephen TaubFebruary 27, 2002

Former Enron president Jeffrey Skilling took off the kid gloves during his more than five hours of testimony before a Senate panel Tuesday.

“The entire management and board of Enron have been labeled everything from hucksters to criminals,” said Skilling in his opening statement. “These untruths shatter lives and do nothing to advance the public understanding of Enron.”

He later declared, “I have not lied to Congress or anyone else.”

Skilling also laced into Tuesday’s other big testifier, whistle-blower Sherron Watkins. “I never duped [former Enron chairman] Ken Lay,” asserted Skilling. “I heard Ms. Watkins testify to her opinion; I have no idea what the basis is for that opinion.”

Still, Skilling’s testimony occasionally stretched the bounds of believability. He insisted, for example, that he did not recall receiving a $5 million bonus a couple of years ago. He also said he did not remember getting nearly $11 million in bonuses from 1998 through 2000. While there’s scant research in this area, most people tend to remember getting a $5 million check. Maybe he had direct deposit.

Interestingly, the former Enron CEO did confirm that he made $66 million from sales of company stock from February 1999 to June 2001. He did not mention that the $66 million is only part of the $108 million he apparently reaped in total from exercising options and selling Enron stock between 1999 and 2000 (according to Enron’s SEC filings). None of the committee members chose to point this out, however.

To his credit, Skilling does remember the $66 million, conceding that he still has the money. But, he added, “It’s my expectation that I will probably spend the next 5 to 10 years of my life battling lawsuits.”

Lawmakers didn’t seem moved by Skilling’s plight. At one point, Sen. Barbara Boxer (D-Calif.) said, “I don’t believe you when you say you didn’t know what was going on.”

And, toward the end of the hearings, Sen. Byron Dorgan (D-N.Dak.), who chairs the Senate Commerce Consumer Affairs Subcommittee, said, “I have great difficulty believing your testimony. I wish I could believe your testimony. But somebody wasn’t home at Enron.”

For her part, former Enron finance executive Watkins stood by her earlier statements. “I believe that Enron had a brief window to salvage itself this past fall,” Watkins told legislators. “And we missed that opportunity because of Mr. Lay’s failure to recognize or accept that the company had manipulated its financial statements.”

But, Watkins added, “I believe that Mr. Andy Fastow would not have put his hands in the Enron candy jar without an explicit or implicit approval to do so from Mr. Skilling.”

Former treasurer and current president Jeff McMahon shook Skilling’s hand before the proceedings began. As you recall, McMahon is reportedly one of the few senior managers at Enron who expressed misgivings about the company’s off-balance-sheet partnerships before the energy company imploded.

McMahon’s testimony yesterday was fairly uneventful, however. He did comment on the large number of employees who were given bonuses as an inducement to remain with the embattled company. McMahon said of his $1.5 million bonus, “It was not necessary for me to receive a bonus to stay.”

Enron’s shareholders and creditors must be thrilled to hear that.

Andersen: Brimstone and Fired

It’s tough times for Arthur Andersen.

While management at the embattled auditor is desperately trying to hammer out Enron-related settlements, it is quietly looking to settle another legal case. This one involves the bankrupt Baptist Foundation of Arizona.

Andersen, the foundation’s auditor, recently offered $150 million to the foundation’s bankruptcy trust, according to USA Today, citing a person close to the case. The parties are reportedly determined to reach a settlement before a civil trial starts March 4 in Arizona.

Andersen is being sued by that bankruptcy trust for $300 million in compensatory damages, plus punitive damages. The lawsuit claims that Andersen ignored financial danger signs, falsified work papers, and—what else?—destroyed records.

As you may recall, about 13,000 investors lost $590 million in the mid-1990s in an alleged Ponzi scheme run by former executives of the Baptist Foundation. The victims included elderly and retired people. Allegedly, the executives used retirees’ money to invest in real estate, and then paid off the investors with funds from new backers, according to published accounts. It’s unclear what happened to the profits at the foundation—if there were any.

So far, three former foundation executives have pleaded guilty to felony charges stemming from the case. In addition, a criminal grand jury in Arizona has indicted five other foundation officials on fraud, theft, and racketeering charges.

Bear in mind that since 1999, Andersen has settled a number of large lawsuits, including $220 million in the Waste Management case, $110 million in the Sunbeam case, and $90 million in the Colonial Realty lawsuit.

In other Andersen-related news:

Buyers United Inc., which offers discounted monthly goods and services such as long-distance and Internet access, fired Arthur Andersen as its accountant on February 20, according to a recent SEC filing. The company hired Crowe Chizek & Co. as its new auditor.

Buyers United said its audit reports for the years ended December 31, 1999 and 2000 were modified because of the uncertainty of the company’s ability to continue as a going concern. “Their reports were not qualified or modified as to audit scope or accounting principles,” said Buyers United management in the filing.

“During the years ended December 31, 1999 and 2000, and during the interim period from December 31, 2000, to February 20, 2002, there have been no disagreements between the company and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Andersen, would have caused Andersen to make reference to the subject matter of such disagreements in their reports,” the company stated in a doozy of a sentence.

In a surprise move, the National Highway Traffic Safety Administration signed a $52,000 contract on February 19 with Andersen to assess the development of a system for identifying auto defect trends, according to Reuters. Andersen is expected to assess software development and identify any problems that could lead to big cost overruns and schedule delays, says the wire service.

The hiring of Andersen comes one month after the Bush Administration asked the General Services Administration to determine whether existing government contracts with Andersen and Enron meet federal standards for business ethics and integrity. The White House said agencies should determine whether they should suspend contracts that did not meet their standards.

Short Takes

Enron subsidiary Portland General Electric tapped PricewaterhouseCoopers to replace Andersen as its independent accountant. Andersen agreed to relinquish the job earlier this month.

—Management at Hanover Compressor Co., a natural gas equipment company, said Tuesday it would restate earnings going back to 2000. Shareholders have filed lawsuits against Hanover alleging the company inflated earnings and revenues. Hanover management also said the SEC has requested information on the company’s joint venture in Nigeria.

Integrated Defense Technologies Inc. and insiders Tuesday raised $154 million in an initial public offering. The defense electronics company and shareholders sold 7 million shares at $22 each, in the middle of the expected range of $21 to $23 a share. Integrated Defense sold 6 million and insiders sold 1 million of the shares. Merrill Lynch & Co., CIBC World Markets, and Credit Lyonnais Securities were the underwriters.

Gap Inc. plans to sell $1 billion of convertible bonds. On February 14, Moody’s and S&P cut Gap’s ratings to junk status.

—About one-third of Starbucks Corp.’s shareholders voted to limit director terms to one year. The purpose of the proposal by a union pension fund: to make directors more accountable to shareholders. The plan would replace Starbuck’s current staggered schedule, which requires three of the coffee specialist’s nine directors to stand for election every three years. Although the proposal lost by a nearly two-to-one margin, it drew unusually strong support for such a resolution.