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July - Duke Energy Employee Advocate

Deregulation - Page 11 - 2002

"They (Enron) even shredded on Christmas Day" - William Lerach, attorney

Enron Enticements

New York Times – by Kurt Eichenwald – February 21, 2002

Bankers for the Enron Corporation told a top executive of the company that they had been led to believe that they could obtain lucrative business from Enron if they agreed to invest money in an outside partnership controlled by Andrew S. Fastow, the company's chief financial officer, according to records of interviews with the executive.

The statements raise the specter of potentially improper activity in the solicitation of stakes in Enron's partnerships, legal experts said.

Effectively, these experts said, the statements describe a circumstance in which Enron executives may have sought personal benefits from Wall Street in exchange for awarding participation in the company's vast business in underwriting securities.

Such arrangements, lawyers said, create serious issues for both the banks that chose to invest based on such an understanding and the executives who communicated the tie between partnership investments and company business.

"It presents some very serious problems from both the investment banks' positions and from Enron," said J. Boyd Page, an Atlanta securities lawyer with Page Gard Smiley & Bishop. "You are talking about some serious disclosure issues here."

Jeffrey McMahon, the former Enron treasurer who succeeded Mr. Fastow last October and was named president of Enron in January, disclosed the statements in interviews last August and October with lawyers for Enron. The interviews were conducted by Joe Dilg and Max Hendrick III, two lawyers from the firm of Vinson & Elkins. They were investigating suspicions related to the accounting treatment of the partnerships that had been raised in August by Sherron S. Watkins, who worked in the company's finance division.

In the first interview, Mr. McMahon's reference to the possible connection was somewhat oblique, according to a Vinson & Elkins memorandum summarizing the encounter. The document and other memos of the interviews were released this week by the House Energy and Commerce Committee, which is investigating the collapse of Enron.

"McMahon received inquiries from bankers about whether continued banking relationships with Enron were dependent on investing in LJM," one of the partnerships, a summary of the Aug. 30 interview says. "McMahon believes that Fastow solicited the 10 or so key banks with which Enron did business to be investors in LJM, and McMahon heard from at least half of them."

In his later interview, Mr. McMahon was far more explicit, saying at least two bankers had said they had been promised Enron business in exchange for their investments in a partnership known as LJM2. For example, Mr. McMahon said that Paul Riddle, an executive with First Union, now the Wachovia Corporation, had called him to complain when his company was passed over for an Enron bond deal.

"He stated that he was promised the next bond deal for investing in LJM," a memo of Mr. McMahon's interview quotes him as saying. The memo adds: "McMahon's response was to the effect, `Not by me, you're talking to the wrong guy.' "

According to the memorandum, Mr. McMahon also said that officials from Merrill Lynch had let him know "not by way of sour grapes, but simply as fact, that it was felt linkage existed between investment in LJM and Enron business."

Officials from two other institutions — Chase Manhattan, now part of J. P. Morgan Chase, and Deutsche Bank — also reported a belief that there was a link between investing in the partnership and obtaining Enron business. Deutsche Bank was cited as specifically regarding the connection as "improper," the memo says.

Merrill sold $349 million in partnership stakes to dozens of investors, including First Union, Deutsche Bank and J. P. Morgan Chase.

Calls to Mr. Riddle, an investment banker with Wachovia Securities in Houston, were not returned. Representatives for Merrill Lynch, J. P. Morgan Chase and Deutsche Bank Alex. Brown declined to comment. Gordon Andrew, a spokesman for Mr. Fastow, declined to comment.

An official of one of the banks said in an interview that an investment banker there had complained to Mr. McMahon and Ms. Watkins about feeling pressured by Mr. Fastow to invest in the LJM2 partnership in order to be considered for future investment banking assignments. But any such "pay to play" pressure was subtle and not stated explicitly, this official said.

The Energy and Commerce Committee plans to expand its investigation to examine the relationship between Enron and Wall Street, Ken Johnson, a committee spokesman, said yesterday.

"We're going to take this investigation wherever it leads us, and right now the muddy little footprints are leading us to the doors of the investment bankers," Mr. Johnson said.

More Regulation Needed

Associated Press – February 20, 2002

INDIANAPOLIS (AP) - Consumer advocates urged lawmakers Monday to approve a bill that would give state regulators the authority to oversee utility mergers and more power to fine companies for poor service.

A rally in the Statehouse rotunda drew about 30 people who spoke in support of placing stricter controls on businesses that produce natural gas, electricity and other utility services.

Many said the recession, coupled with financial debacles such as the bankruptcy of energy giant Enron, should demonstrate to elected officials that consumers need protection from higher bills and corporate greed.

"This is not a time for less regulation or less oversight," said Dave Menzer, a spokesman for the consumer watchdog group Citizens Action Coalition.

The legislation would permit the Indiana Utility Regulatory Commission to fine utilities up to $15,000 for failing to comply with state laws or regulations. The fines would not apply to telephone companies, since most of them already have service agreements with the IURC.

The agency would also gain authority to approve utility mergers.

The bill passed the House earlier this month. It is scheduled to be considered by a Senate committee Tuesday.

The legislation also would give the IURC additional authority over merchant power plants, which are smaller generating stations that produce electricity to be sold wholesale, usually in other states. Companies wanting to build such plants would be required to conduct public hearings in the county where the plant would be located.

The House passed similar legislation last year, but the House and Senate could not settle differences on the issues in the waning hours of the 2001 legislative session.

Activists also argued against a Senate bill that would allow electric utilities to reap more money from rate payers if they invest in equipment to use Indiana coal in a more environmentally friendly way. The bill will be reviewed Tuesday by a House committee.

Proponents say the bill creates incentives for companies to improve their coal-burning plants, but environmentalists and consumer advocates insist it contains provisions designed mainly to net larger profits.

"We should not be out penalizing consumers because utility companies refused to invest in clean-coal technology," said Grant Smith, utility policy coordinator for Citizens Action Coalition.

Federal Energy Investigation

Associated Press – February 18, 2002

WASHINGTON (AP) - Federal regulators are investigating wholesale power and natural gas markets, with a focus on whether manipulation by Enron Corp. or other energy traders caused big price increases in the West a year ago.

The Federal Energy Regulatory Commission will look at both the physical energy transactions and financial trades such as those dominated by Enron's online trading division, the commission's chairman, Pat Wood, said Wednesday.

The investigation could take as long as six months and, while focusing on trading activities of Enron, would include wholesale gas and power trades of other energy companies as well, Wood said in an interview.

After the staff findings, the commission will decide whether to start a second round of investigations into whether to require changes in long-term power contracts ``whose prices may have been influenced by any inappropriate Enron activities,'' said Wood.

Several Western senators have demanded that the regulatory commission pursue evidence of possible market manipulation by Enron after hearing testimony from an energy consultant that the price of some long-term power contracts, known as ``forward contracts,'' dropped sharply in the week after Enron filed for bankruptcy on Dec. 2.

But Sen. Maria Cantwell, D-Wash., said she was disappointed that the commission was not moving more quickly into a formal investigation into whether some of the high-priced power contracts negotiated in the West were entered into improperly and should be reworked.

Both in California and the Pacific Northwest, utilities entered into long-term power contracts that many of the utility and state officials now think might have been driven up because of manipulation by Enron and other independent power marketers and suppliers.

Based on these allegations, the commission has begun an investigation ``of whether there was actually some manipulation'' of power or natural gas markets by Enron or any of its affiliate companies, Wood said.

He later told a House Energy and Commerce subcommittee that the disappearance of Enron, once one of the largest energy traders, has had little, if any, negative impact on energy markets or energy supplies.

Federal officials said at the hearing that Enron's activities largely escaped government scrutiny because the company either was exempted from some regulations or were involved in unregulated trading activities.

It was a ``formula for allowing a few big players like Enron game the market to the detriment of both producers and consumers,'' said Rep. Edward Markey, D-Mass.

Aides said Sen. Dianne Feinstein, D-Calif., plans legislation that would require the Commodity Futures Trading Commission, to regulate the online energy trading that Enron dominated.

Texas Deregulation Not Too Smooth

Employee Advocate – – February 18, 2002

The Texas electricity market has been deregulated, but consumers are not running to jump onto the bandwagon, according to the Houston Chronicle. Few consumers have switched to new providers.

Apparently the average consumer is not interested in jumping through hoops to try to save a few pennies on electricity. The lure of saving pocket change caused the rates of many in California to quadruple! Even then, the power was not always available!

Reliable, regulated power at a reasonable price is always preferable to unstable power with even more unstable prices, that come with some gimmick. It should be obvious to all, by now, that the only ones to really profit from deregulation are power suppliers and traders. They designed the deregulation rules. And, they designed the rules to benefit only themselves.

A business consultant said that deregulation was still confusing to the average person.

More confusion, complication, and fine print are not what most people want in their lives. What is wrong with coming home and turning on the lights – and they work. You pay your bill to a regulated power company; the lights work and the bill does not quadruple, overnight!

Smitty Smith, with Public Citizen, thinks that consumers might have saved more under the old system. He said: "When competition came in, rates were frozen at artificially high prices, in order to allow the utilities to pay off their power plants earlier. The rates should have dropped even more than 6 percent."

Houston resident Clark Isaacs is not pleased with the new system. He signed with a new company, and it pulled out of the area. Now, he is having trouble getting connected to the power company that he wants. Isaacs is also having trouble figuring out the pricing plans and charges: "It's confusing, to say the least, and I'm an attorney."

His assessment of deregulation is: "I think it's back to the same old Texas two-step, and everybody is making a buck."

It now takes longer to get new electrical service established. Deregulation is synonymous with Enron; what you get will not be exactly what was promised.

Deregulation complaints are being received about long waits for service, slamming , and deceptive trade practices, including door-to-door sales team making misleading statements.

The utility commission is going to have to bring in more staff and consultants to handle all of the deregulation complaints. They could just forward them to G. W. Bush and Kenneth lay.

Enron Suicide Questions

San Francisco Chronicle – by Harley Sorensen – February 18, 2002

(2/11/02) - I used to know a guy they called Lucky. He was a good old boy from a Texas border town. He was likable enough, but they say he had a temper. One night, at a dance (so goes the story), Lucky lost control of his temper and shot three Mexicans to death.

The next day, according to the legend, the sheriff showed up at Lucky's door and said sternly, "Boy, you'd better get out of town."

That's Texas, where violence is a way of life.

I hesitate to pick on Texas -- again! -- because the ongoing feud between California and Texas distracts us from some of the real issues. But you have to admit that Texas is a violent place, compared with the other states.

As a cab driver years ago, I had a sailor from Texas in my cab. San Francisco's punks had just evolved, and, on a ride through North Beach, this guy was taking in the punk scene with undisguised contempt. He didn't say anything for a long while. Finally, he said what was on his mind. "Back where I come from," he said, "we'd beat the crap out of these people!"

That seems to be the Texas solution to problems: Beat 'em up. Somebody's real bad? Execute the sucker. Don't like President Kennedy? Assassinate him. Got a gripe with humankind? Climb atop a tower and shoot everybody in sight.

There is a frontier mentality in Texas that's never quite gone away. It has a plus side. Texas produces war heroes like nobody's business. When it comes to doing things with guns, Texans excel.

All of this comes to mind because of the recent suicide of John Clifford Baxter, the former Enron vice chairman who died of a gunshot to the head a few days before he would have testified before one or more congressional committees. It was also a few days after he confided to friends that he may "need to get a bodyguard," according to the Telegraph, a British newspaper.

Baxter was a whistle-blower. He complained about Enron's business practices long before they became public knowledge. He quit the firm last year and sold $35 million in stock.

Because of the timing of Baxter's death, it seems logical that the authorities should examine it very carefully.

So far they haven't.

This is hard to believe, but the person in charge of the initial investigation at first declared that the evidence of suicide was so powerful that an autopsy wouldn't be required.

No autopsy? In a good share of the civilized world, an autopsy is performed after any death unattended by a physician. Not so in Texas?

In any case, yielding to public pressure, the authorities in the Houston suburb of Sugar Land, where Baxter lived and where his body was found, changed their minds and decided to have an autopsy after all. Possibly they were influenced by the location of Baxter's car, on a busy street. Most public suicides are committed in some more pleasant place.

It didn't take Harris County Medical Examiner Joye Carter long to declare that, yep, by gum, Baxter committed suicide. He died Friday, Jan. 25. On Saturday, Carter made it official: suicide. She didn't have to interview anyone or do any tests that might take a few weeks.

There was an apparent suicide note near Baxter's body and a .38 revolver at his side, and the doors of his Mercedes were locked. That looks pretty convincing.

Yet most of Baxter's friends are skeptical. He wasn't the suicide type, they say, according to published reports. But neither was Duane Garrett, the popular lawyer and KGO talk-show host who was found floating under the Golden Gate Bridge in 1995. What we can see proves little; you never know about people.

The authorities have not yet released Baxter's alleged suicide note to the public, even though more than 80 news organizations have asked for it, citing the Texas Public Information Act. Right now, the fate of the note is in the hands of the Texas attorney general, John Cornyn, who incidentally is running as a Republican for the U.S. Senate seat being vacated by Phil Gramm.

I wouldn't trust any decision that comes out of the Harris County Medical Examiner's office. That place is a mess and has been for a long time.

One of its most notable disasters occurred a few years ago when, because they were short of space, somebody stacked a bunch of bodies -- including that of an infant -- on top of one another. The scene was so grotesque that an employee surreptitiously took pictures of it and released them to the press. Carter claimed it was a bum rap, that somebody had staged the pictures.

On two occasions, Carter fired employees who complained about problems in the M.E.'s office. Both sued, and both won.

One of the people fired, a DNA expert, claimed that she was pressured to produce results favorable to the prosecution in a murder case, even though her examination did not find such results.

Carter came to Houston from the District of Columbia, where she was chief medical examiner. That office, too, was a disaster, but it had been long before Carter took it over. If anything, Carter improved the D.C. office.

Carter's online biography shows her to be the author of an inspirational book titled "My Strength Comes From Within." It also says that, while serving in the Air Force, she provided forensic education "to the military, State Department and federal investigative agencies."

Carter headed the District of Columbia office in 1993, when Paul Wilcher died. Wilcher, an investigative attorney, was engrossed at the time with an "October Surprise" theory, in which a prison inmate claimed he had piloted the elder George Bush to Paris for secret meetings with Iranians who were holding 52 Americans hostage in Teheran. According to the theory, Bush wanted to delay release of the hostages until after the Jimmy Carter-Ronald Reagan election contest. An early release would have helped Carter.

Wilcher, 49, was found dead on his toilet seat on June 22. He had been in good health. By July 15, the Washington Times reported, no cause of his death had been established. Carter said at the time that her office was busy. The Times never followed up on later autopsy results, and, judging from a search, the Washington Post never mentioned Wilcher at all.

When Bill Clinton's boyhood friend and White House lawyer, Vince Foster, committed suicide in 1993, it led to at least four investigations, including one by special prosecutor Kenneth Starr. It would seem to me that J. Clifford Baxter's death deserves at least one inquiry.

In any case, that little circle of insiders in the Houston and Harris County area certainly have the connections and the capability for skulduggery. There is no indication at this time that anybody has done anything wrong, even the charming Dr. Carter. However, the Baxter death cries out for a complete investigation -- by outsiders.

After all, Houston is in Texas. And we know how Texans deal with their problems.

Duke Could Not Steam-Roll Florida

The Miami Herald – by Joni James – February 18, 2002

(2/11/02) - TALLAHASSEE, Fla .-- Enron executives had a direct pipeline to influence White House energy deregulation policy, but when it came to calling the shots in Florida's state capital, the energy giant's cachet, money and power brought meager results.

The reason: Florida's own homegrown power monopolies had more influence as the state undertook discussions on whether to restructure the wholesale electricity market.

And the California energy crisis last year, which soured lawmakers on the concept of deregulation, surely didn't help.

Two months after Enron declared bankruptcy, political adversaries of Florida Gov. Jeb Bush are searching hard for evidence that family ties and campaign cash bought Enron favors from the Governor's Mansion.

Last week, the governor's office released documents showing that Bush twice conferred with Enron officials at their request. The first time was in 1999, when Enron subsidiary Azurix pitched a proposal to underwrite part of the Everglades restoration in exchange for water rights. The second contact was last April, when Kenneth Lay, then Enron's chairman, requested a phone conference to talk about federal deregulation issues.

The call came as Bush and key Republican lawmakers had already backed away from plans to pass any deregulation legislation during the 2001 session. Bush, who says he still supports a "cautious move" toward deregulation, said he doesn't remember the conversation with Lay. As for the Azurix idea, Bush said he was intrigued, but the company never provided a formal enough proposal for him to even consider it seriously.

"Did anything happen that Enron benefited from? We've really deregulated, haven't we?" Bush said sarcastically last week.

Despite the $400,000 in political contributions that Enron made to Florida politicians in the past five years -- including $6,500 to Bush's 1998 campaign for governor -- independent power producers such as Enron, Duke Energy and Calpine have yet to get what they want: a wholesale energy market in Florida.

Instead, they have been outflanked by powerful investor-owned utilities -- namely Florida Power & Light, Florida Power Corp. and TECO Energy Inc. -- that account for 70 percent of the electricity market in Florida and that have long dominated the state's energy policy.

In 1998 alone, Tampa-based TECO and its employees spent more than $520,000 on political campaigns. Juno Beach-based FPL Corp. and Florida Power Corp. of St. Petersburg gave at least $424,000 and $282,000 in political contributions, respectively, in 1998.

Though Lay might have been on a first-name basis with the governor, Florida utilities employed dozens of other well-connected Republican lobbyists, including some with close personal ties to Bush.

John "Mac" Stipanovich, a chief strategist of Bush's failed 1994 gubernatorial bid, is a lobbyist for Pensacola-based Gulf Power.

Paul Bradshaw, the husband of Sally Bradshaw, Bush's former chief of staff who ran his 1998 campaign, lobbies for TECO.

"These companies employ so many people in the state, they have been involved in the campaign cycle for years," said Sen. Tom Lee, R-Brandon, who first proposed that the state consider deregulation during the 2000 session. "Enron, Duke Energy, Calpine, all of them combined can't fight that." The utilities also had a trump card that Enron and the other outsiders did not: They control the state's electricity stream.

"There's no way this can happen without [the state utility companies] on board," said Walter Revell of Coral Gables, a former state transportation secretary and lifelong Democrat. Shortly after Lee failed to get his deregulation bill passed, Bush created his own task force on deregulation, the Florida 2020 Energy Commission, and tapped Revell to lead it.

The governor asked the commission to spend 18 months examining Florida's long-term energy needs and to suggest how to restructure the market to allow for competition. The underlying thesis was that competition between electricity providers would ensure reasonable power rates as Florida's energy needs expand.

Though Florida has relatively low power rates now, Bush said he was concerned that future demands could outstrip supplies and cause price increases.

From the beginning of those discussions, Enron kept a far lower profile than other out-of-state energy concerns, according to Revell, Lee and others who participated in the commission's deliberations.

Revell knows Lay, having met him two decades ago when Lay worked for a Florida gas company. But Revell said that he talked with Lay only once while on the commission, and then not about energy deregulation. Instead, Lay called to ask Revell to help a family member find work in Miami. Revell also said the governor never mentioned Lay or Enron to him.

For the out-of-state companies, one of the prizes of a deregulated system was approval to build "merchant plants" in the state.

Merchant plants are independent, high-volume power plants built on speculation that the owner can find utilities or other large customers to buy its electricity.

The front-runner among companies hoping to build merchant plants was North Carolina-based Duke Energy. In April 2000, Duke had seen its hard-fought proposal to build a plant in Volusia County thrown out by the state Supreme Court. The court said Duke had failed to meet Florida's restrictions that power plants must demonstrate there will be a demand for the energy they provide.

Under state law, out-of-state companies have been allowed to build "peaker plants" that generate electricity only for peak demand times. Enron's efforts to build two such facilities in Broward County are now stalled in state administrative court because of local opposition.

From the start, Duke, Calpine and other merchant power providers pushed for the 2020 commission to recommend, in an interim report to the 2001 Legislature, that restrictions on merchant plants be lifted.

The commission eventually did back the idea, but only after it also embraced a caveat the Florida utilities demanded -- that the state loosen the restrictions slowly and allow the local utilities to also turn their power plants into stand-alone entities that could compete with the out-of-state companies for power customers.

Under Florida's plan, finalized in a report issued earlier this year by the 2020 commission, utilities would enter long-term contracts with individual plants for power supply, and the state's Public Service Commission would monitor the deals to ensure reasonable rates.

"This was about the fact that restructuring is happening everywhere," Revell said. "It's not a matter of whether Florida will restructure, but how and when. Our goal was to figure out the best way to manage it. We forged a very fragile, delicate agreement." But even as the commission put together a rough framework to suggest to the 2001 Legislature, California's energy crisis was escalating.

In March, as legislators reported to Tallahassee, rolling blackouts in California dominated headlines.

Even though the 2020 commission's proposal differed from California's model -- where utilities bid minute-by-minute for energy supplies -- deregulation in any form was eyed suspiciously by politicians and the public. "The fact is it would have been political suicide to push deregulation," Lee said. "You'd say deregulation, and all anyone thought about was California." This year, in a session already crowded with negotiations over a tight budget, political redistricting and a sales-tax overhaul, deregulation has barely gotten a hearing. Two lawmakers, including Lee, have filed bills to consider the issue. But no one is expecting them to gain much momentum.

"Restructuring certainly did look like a trend," said Chuck Hinson, a lobbyist for TECO, the utility credited with crafting the compromise by which utilities would agree to support restructuring.

"But today it looks a lot less like a trend, following California and Enron. I think there are a lot of unanswered questions about how to do this. And, to some extent, whether we should do it."

Ken Lay, G. W. Bush, and Deregulation

New York Times – by Jim Yardley – February 17, 2002

AUSTIN, Tex., Feb. 15 — In more than two dozen letters written from Kenneth L. Lay to then-Gov. George W. Bush, the former Enron chairman lobbied repeatedly for his company's pet issue, electric deregulation, sought the governor's presence at Enron-related functions and sent magazine articles and personal notes.

The letters are included in 350 pages of correspondence between Enron executives and Mr. Bush when he was Texas governor, all of which suggests that Mr. Lay was involved in a variety of pressing state issues, including education, civil justice reform and electric deregulation. Mr. Lay also asked for the governor to lobby the state's Congressional delegation on federal issues important to Enron, including tax relief.

The letters, released today after open records requests, are a reminder that the relationship between Mr. Lay and Mr. Bush, which has chilled as scandal has enveloped Enron, was once close. Mr. Bush wrote Mr. Lay a teasing note about his 55th birthday. Mr. Lay twice thanked the governor for Christmas presents, including in December 1997 after Mr. Bush sent him a state Capitol ornament.

"It was a thoughtful gift and one our family will enjoy hanging on the tree every year," Mr. Lay wrote. "We want to wish you and your family a healthy, happy and prosperous 1998. Ken."

A year later, after thanking Mr. Bush for a "Tejano Santa" print for Christmas, Mr. Lay scribbled a handwritten note in the margin: "George and Laura — Linda and I are so proud of both of you and look forward to seeing both of you in the White House. Hope you have a great Christmas with your family, Warmest Regards, Ken."

Mr. Lay's pre-eminent concern in his letters was the deregulation of the retail electricity market, a law signed by Mr. Bush in 1999. He wrote Mr. Bush several letters about the issue, including one after the 1997 legislative session, when the measure fell short of passage.

"We would have liked to have accomplished more," Mr. Lay wrote, "but realistically, the issue would not have moved nearly as far as it did without your involvement, and for that Enron is deeply grateful."

On other occasions, Mr. Lay solicited Mr. Bush to appear at a variety of functions, including twice for an annual conference promoting trade between Japan and the United States, for a gala in Houston for a Civil War musical sponsored partly by Enron as well as for the 1998 World Economic Forum in Davos, Switzerland. Mr. Bush attended the Japan conference at least once, though he apparently declined the gala for the musical. It could not be confirmed whether he attended the Davos conference.

In April 1997, Mr. Lay wrote the governor about an upcoming meeting scheduled between Mr. Bush and an influential official from Uzbekistan. He noted that Enron had opened an office in Tashkent and was negotiating a $2 billion joint venture.

"I know you and Ambassador Safaev will have a productive meeting which will result in a friendship between Texas and Uzbekistan," Mr. Lay wrote.

Two years later, Mr. Lay wrote asking that Mr. Bush meet with the prime minister of Romania during his visit to Houston. He noted that Enron had recently finalized a joint venture gas marketing deal in the country. But a handwritten note by a staff member suggests that Mr. Bush declined to meet the official.

Scott McClellan, a White House spokesman, called the letters and other documents "old news" and said the relationship between Mr. Bush and Mr. Lay was never improper.

"The president has always acknowledged that he was a supporter," Mr. McClellan said of Mr. Lay, the man Mr. Bush once nicknamed Kenny Boy and who contributed about $600,000 to Mr. Bush's campaigns.

Mr. McClellan added, "But as governor he made decisions based on the best interests of all Texans."

The correspondence released today were taken from 1,800 boxes of documents collected during Mr. Bush's service as governor from January 1995 until December 2000. Before he became president, Mr. Bush used a new state law to designate his father's presidential library at Texas A&M University as repository for his papers as governor. This arrangement has left the status of the papers murky.

The presidential library is federally operated and does not consider itself subject to the tough open records law in Texas, which requires a response to all requests for public documents within 10 days. Officials at the Texas state archives, the usual repository for governors' papers, have expressed concerns. An opinion on the legality of the arrangement is expected in May from Attorney General John Cornyn of Texas.

Until then, the papers are being handled under an interim memorandum of understanding, which gives President Bush's lawyer, Terri Lacy, the right to know in advance which documents are being released. Before today's release, Ms. Lacy acknowledged that she had questioned whether archivists needed to release first drafts of certain documents before ultimately relenting.

"I never tried to block the release of the first drafts," she said today from Houston. "I just questioned whether it was helpful to anyone."

Also included among the documents released today were records from the Governor's Business Council, the advisory group appointed by the Texas governor. Mr. Lay, the group's chairman, was first appointed by Gov. Ann Richards, then reappointed by Mr. Bush.

In documents from 1995, Mr. Lay and other council officials raised money and worked to build public support for a reading initiative championed by Mr. Bush that later became state law.

"I know that the governor spoke to Ken Lay about the importance of providing some `outside' momentum to his initiative," one council administrator wrote in a memo.

Tom Smith, director of Public Citizen, a nonprofit consumer and government watchdog group, said he believed that Mr. Lay and other business officials supported the reading initiative because of the governor's help on other issues.

"Essentially what you see here is kind of a quid pro quo," said Mr. Smith, whose group had filed an open records request for the documents, along with several news organizations, including The New York Times, "where the governor helps on electric utility deregulation and tort reform, and these guys are helpful for the governor on his education reform."

Mr. McClellan said electric deregulation, tort reform and education reform all had strong bipartisan support in Texas and disputed any characterization of a deal.

Enron Insider Trading Probe

The Wall Street Journal – by S. Pulliam, R. Smith – February 17, 2002

Feb. 15 — Government officials are probing whether Enron Corp. engaged in what might be a form of insider trading involving its own stock that enabled the company to pocket a gain of as much as $100 million, a person familiar with the matter said.

Under Investigation is a transaction involving Enron stock by one of its off-balance-sheet partnerships. It occurred shortly before Enron released earnings on Jan. 20, 2000, that were accompanied by bullish projections about its broadband-capacity trading business that sent the company’s stock up nearly 26% in a single day, to $67.38 from $53.50.


That day, Enron staged an event for securities analysts at which Scott McNealy, chief executive of Sun Microsystems Inc., made a surprise appearance. Mr. McNealy joined Enron president Jeffrey Skilling and announced that Sun would sell 18,000 computer servers to Enron, showing that both firms expected explosive growth in the broadband business.

One analyst, who attended that meeting in Houston, said excited analysts “literally ran for the hallways” to place cellphone calls about the arrangement, which came at the height of the technology boom. Mr. McNealy’s appearance was accompanied by Mr. Skilling’s projections that the value of contracts for access to Enron’s national fiber-optic network would exceed $5 billion by 2004, up from about $160 million in 2000.

A Sun spokeswoman says Enron cooled quickly — and, it seemed, oddly — on the deal that had generated such excitement. “It started like a jitterbug and ended like a slow waltz,” said Dottie Wanat, Sun spokeswoman in Palo Alto, Calif. Enron bought “only a few” servers as it turned out, she said, and within six months the deal effectively was dead.

The off-balance-sheet partnership of Enron that is the subject of the government inquiry didn’t buy shares in the company, but instead removed a “hedge” designed to protect the partnership from swings in Enron stock just before the news announcement, the person familiar with the inquiry explained.

Hedges, which come in a number of forms, generally have the effect of protecting against a sharp decline in a stock’s price but, in doing so, also can limit potential gains if a stock rises sharply. Investigators are trying to determine whether the Enron partnership removed the hedge on Enron shares on the expectation that the shares likely would rise, eliminating the need to keep the hedge protection in place.


Though details about the move — including which of the many Enron partnerships was involved — couldn’t be determined, the transaction resulted in a gain of between $80 million and $100 million, the person added. It is unclear whether the hedge was put back on the Enron shares held by the partnership following the announcement.

Enron spokesman Mark Palmer declined to comment on any of the allegations.

While the timing of the hedging transaction by the Enron partnership raises questions, it isn’t clear whether it would violate insider-trading laws, which are designed to prohibit individuals, as well as companies, from benefiting from the use of potentially market-moving information before it is released to other investors…

Possible Enron Criminal Investigation

The Orange County Register – by John Howard – February 16, 2002

(2/13/02) - SACRAMENTO -- The Senate panel probing price-fixing in California's energy market voted Tuesday for contempt charges against Enron Corp. and requested a criminal investigation into alleged document-shredding by the company.

If affirmed by the full Senate, the contempt findings could result in jail time and $1 million-a-day fines.

Tuesday's actions, which came on a pair of 5-0 bipartisan votes, mark the first time a legislative body has voted to hold Enron in contempt, despite ongoing probes in the U.S. Congress and other jurisdictions where Enron has also failed to comply with requests for information.

The California panel, known formally as the Senate Select Committee to Investigate Price Manipulation of the Wholesale Energy Market, urged the full Senate to find Enron in contempt of the Legislature for allegedly destroying documents the panel subpoenaed months ago and for refusing to let executives testify before the panel.

The Senate could act within two weeks. Enron was not available to comment.

The criminal investigations are sought in Orange County, where until recently Enron had an office in Costa Mesa, and in Sacramento, where thousands of Enron documents have been placed in a sealed depository, said Sen. Joe Dunn, D-Santa Ana, head of the committee.

The committee also wants the state attorney general to investigate whether Enron officials conspired to shred documents, a felony.

Dumping Enron Stock

Knight Ridder Newspapers – by Gregg Fields – February 12, 2002

HOUSTON — Enron had a reputation as a hard-charging organization that handsomely rewarded top performers, but an analysis of company records suggests the opposite was true for many executives: They profited handsomely from Enron stock sales even as their divisions posted massive losses.

And while many Enron officials sold stock unceasingly last year, often unloading tens of thousands of shares for millions of dollars in one fell swoop, in only one case did anyone buy some — testimony to the theory that executives suspected the outlook was grim.

Ken Rice is an example of someone who appears to have made a lot more money than his division ever did. Rice was chairman of Enron Broadband, an aggressive effort by the company to sell time on a national network of high-speed transmission cables across the country.

Enron bet big on broadband. Estimates are that Enron spent more than $1 billion in constructing a network and perhaps another $1 billion in other startup costs.

Rice's take: $72 million in proceeds from stock sales between October 1998 and November 2001, according to a recent lawsuit filed in Houston by Amalgamated Bank, a labor-owned financial institution that lost more than $10 million on the Enron collapse.

Joseph Hirko, president of Enron Broadband, did very well, too. He got $35 million for his Enron stock, according to court filings.

The problem: Enron Broadband was a colossal catastrophe. Experts say its out-of-control costs and a glut of broadband providers proved to be the parent company's mortal blow.

Calls to several Enron directors weren't returned, and Jacks Nickens, the Houston attorney representing most of the officers, also failed to return a call seeking comment for this story.

However, Nickens has said previously that the lawsuit represents a distorted view of executives' behavior. For one thing, the proceeds don't deduct what the stock cost initially, so the actual profits are less. And many of the officers retained substantial stock holdings, evidence they still believed in the company.

But Amalgamated Bank, owned by the Union of Needle Trades and Industrial Textile Employees, sees things differently. Its lawsuit alleged 29 insiders, essentially officers and directors, were "engaged in unlawful insider trading by disposing of millions of dollars of their own Enron shares while in possession of the material adverse information concerning Enron's operations."

Their total proceeds: $1.1 billion.

While Amalgamated's legal claims are yet to be tested in court, the record clearly shows a pattern of relentless public promotion by Enron officials and unfettered dumping of their private holdings. And as with the broadband unit, a division didn't need to earn a profit to make its managers rich.

Ken Harrison was chairman of Portland General Electric, an Enron subsidiary in Oregon.

As a business model, it hasn't been doing well. It lost $17 million in the third quarter, largely because it has long-term contracts to buy electricity at prices well above current market rates.

Enron recently announced plans to unload the subsidiary in a $3 billion deal. That's $200 million less than Enron paid for it five years ago.

But if Portland proved a less than stellar investment, it worked out well for Harrison. In the last three years he has sold stock worth $75 million.

Another case: Rebecca Mark-Jusbache, who was chairwoman of Azurix, an Enron unit formed in the late 1990s to become a global trader in water supplies.

Azurix didn't fare well as a business. Recently, Enron took a loss of $287 million related to "asset impairment" on Azurix.

But in the last three years, Mark-Jusbache sold shares worth $79 million.

The largest Enron seller by far, according to the lawsuit, was Lou Pai, a relative unknown who headed Enron Energy Services, a subsidiary set up to sell electricity supplies to commercial users in the new era of deregulation.

It took until late 1999 for Enron Energy to turn a profit. And though it reported operating earnings of $103 million in 2000, Enron recently acknowledged its previous profit reports were overstated and not reliable. Still, even the $103 million figure is less than third of the proceeds Pai received on stock since 1998, according to the lawsuit. His take: $353.7 million.

That's more than three times the $101 million windfall of Ken Lay, Enron's CEO, during this period. Lay is scheduled to testify before Congress on Tuesday, but is going to invoke the Fifth Amendment, a Constitutional protection against self-incrimination, and refuse to testify.

Investigators have noted that Lay's sales contrasted sharply with his public exhortations for others to buy the stock. For instance, last Sept. 26 Lay told employees the third-quarter earnings outlook was "great." Yet, at the start of the third quarter he sold stock on virtually every business day for a month.

Corporate officers are entitled to sell stock holdings, of course, and in fact their sales are public record. But there is a major caveat: They can't trade on insider information, or material information that hasn't been publicly disclosed.

Furthermore, analysts often look at insider sales as an indication of management's faith in a company's prospects.

In that regard, the Enron pattern last year was a clear vote of no-confidence. Every insider transaction was a sale, save one: In August, chief financial officer Andrew Fastow bought 10,000 shares, at an average price of $36.98 each.

Fastow has been pointed to as the mastermind behind the offshore partnerships that hid Enron's true debt levels until the company collapsed from their weight. An internal report released last week criticized Fastow for earning tens of millions of dollars on the partnerships after putting in very little of his own money.

Company officials have said little about their distaste for Enron stock last year.

Lay, for example, has said through his attorneys that he needed the money to pay debts, despite having received compensation that approached $300 million since the late 1990s. His wife recently told an interviewer for NBC's "Today" show that the couple is verging on bankruptcy.

Deregulation - Page 10 - 2002