February 14, 2002

Mr. Chairman, thank you for holding this hearing as the Committee continues its investigation into the actions that caused Enron, once the seventh largest company in the country, to become the largest bankruptcy in history. Each hearing that we have held -- and I expect that we will hold several more -- reveals more of the internal corruption that destroyed Enron. This corruption swept in Enron’s top management, as well as its in-house and outside accountants and lawyers, all of whom reviewed and approved the transactions that we are discussing today. All of them apparently knew that Enron was pledging its stock to guarantee its own hedges with an alleged outside party.

This was a violation of all accounting procedures and apparently one that the Houston office of Arthur Andersen approved over the opposition of its Chicago office. It led directly to both a $1.1 billion reduction in Enron’s equity and a $700 million reduction in earnings. These same people knew that a partnership run by Enron’s chief financial officer was benefitting greatly from these transactions. All of them, and an unquestioning board of directors, did nothing.

I want to thank Ms. Watkins for the heroic efforts she made to help Enron avoid this -- in her own words --"implosion in a wave of accounting scandals." Ms. Watkins took the actions that should have been taken months before by others both inside and outside Enron, with fiduciary duties to the company and its shareholders. I applaud her. It is never easy to be a whistleblower, particularly in a company where the mentality did not encourage negative news. Bearers of bad news are often punished.

Today we are going to concentrate on the Raptor transactions, which are described on the report of the special committee as "extremely complex Raptor structured finance vehicles" designed to allow Enron to "avoid reflecting losses in the value of some merchant investments in its income statement." We cannot today fully understand the structure of these vehicles, but we know that they are breathtaking in their scope and audacity -- and in their impact. These four vehicles resulted in the write-down of equity, the restatement of earnings, and the credit rating reduction that sank Enron. Although the Raptors were supposed to take on the risk of losses in merchant investments, they were actually guaranteed by Enron stock and used the appreciation in Enron stock’s value to increase earnings.

This is a violation of basic accounting principles. The accounting shenanigans that permitted such returns were instigated or approved by Andrew Fastow, Enron’s chief financial officer; Richard Causey, Enron’s chief accounting officer; Rick Buy, Enron’s chief risk management officer; Arthur Andersen; and Vinson & Elkins, Enron’s outside counsel.

The Raptors also benefited greatly LJM2, a special purpose entity run by Mr. Fastow. Although they were supposed to hedge potential losses in some of Enron’s merchant investments -- they actually repaid LJM2's total investment plus some very generous returns with Enron taking the total risk. As described in an LJM2 presentation to its partners in October 2000, Raptor III, for example, paid out $41 million for a $30 million investment in just eight days. This was an amazing 2,503 percent annual return for the investors.

I think it is important to note for the record, Mr. Chairman, that Mr. Fastow, Mr. Causey, Mr. Buy, and Arthur Andersen have all been removed from their positions. Perhaps too late but gone anyway. But Enron has supported Vinson & Elkins, which approved every single one of these deals for Enron and then papered over Ms. Watkins’ allegations in a report finding that not a single transaction with LJM "was contrary to Enron’s best interests," to this day. The law firm’s written report was issued just one day before Enron announced its equity write-down and earnings reductions based on the very Raptor transactions that Ms. Watkins brought to Kenneth Lay’s attention. I think it would be quite appropriate to devote a hearing to the role Enron’s legal counsel played in this fiasco that took $70 billion from the pockets of unsuspecting shareholders and employees.

But today, I look forward to hearing from an extraordinarily courageous woman who has been a bright spot in an otherwise sorry and outrageous saga.