The Enron Corp. Controversy
With Allen W. Williams, Jr.
Chair of Foley & Lardner's Regulatory Practice Department
Monday, Feb. 4, 2002; 3 p.m. EST

"Former Enron chairman Kenneth L. Lay last night abruptly canceled a much-anticipated appearance today before a Senate panel in the wake of a scathing report on the management failures and self-dealing that led to his company's spectacular collapse." Read the full story.

Join Allen W. Williams, Jr., chair of Foley & Lardner's Regulatory Practice Department and co-chair of the Energy Group, on Monday, Feb. 4 at 3 p.m. EST, discuss former Enron CEO Kenneth Lay’s cancelled testimony and the company’s financial problems.

Williams has been substantially involved in energy industry matters since 1972. Since 1985, Williams has concentrated his practice in the developing area of energy industry deregulation. Williams has negotiated numerous major cogeneration development contracts, representing utilities and developers, and handled various energy company mergers and acquisitions. More recently he has represented the regulated and unregulated participants in the energy industry, and also large energy users in a variety of jurisdictions in their dealings with utilities. Williams is a member of the Legal Committee of the Edison Electric Institute, the association of investor-owned utilities.

Below is the transcript.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Arlington, Texas: Do you anticipate that there will be criminal prosecutions on the Federal and State level for the Enron Debacle? And if not, why not.

Allen W. Williams, Jr.: There is a very large investigation underway being carried out by a federal task force. That is being supplemented by the current Congressional inquiry. There is a lot of smoke, and many observers think the recent Powers report suggests the possibility of criminal fire. But a criminal conviction, unlike a civil suit victory, must overcome the strong presumption of innocence, beyond a reasonable doubt. In the circumstance of accounting opinion, that could be hard to accomplish.
But for shredding documents to avoid prosecution, if that is proven to have occurred, well......

Washington, D.C.: Mr. Lay's attorney Mr. Silbert apparently has failed to deliver Mr. Lay to the Committee today. Is this wise? Mr. Lay will certainly be subpoenaed, but the House and Senate are much less generous in testimonial immunity negotiations than DoJ is. Thoughts? - Attorney in D.C. Suburbs

Allen W. Williams, Jr.: There are several courts involved with Mr. Lay's legal problems. Federal civil actions to take his money away, criminal actions to penalize him and possibly put him behind bars (worst case), and the court of public opinion in Congress. He will have to choose between those, since there is great risk that in Congress he would explain himself to the satisfaction of the public but implicate himself in a criminal action, or lose the civil actions. So would I counsel him to stay out of congress? Probably. His reputation in the court of public opinion is probably beyond salvage, and he needs to worry about the other risks in judicial proceedings.

Waterford, Mich.: How many business' are out there "lurking" in these types of operations that Enron is charged with? Hiding losses, pyramid schemes -- over inflating their worth, verbal chanting of their solid foundation, only to be worth nothing.

Allen W. Williams, Jr.: This is a question Wall Street observers and investors are asking themselves. Are the behaviors here those of business "outliners" who are behaving as statisticians would say more than two standard deviations outside the norm, or has their behavior moved inside that bell curve defining the norm, and therefore we all need to worry. Certainly, Mr. Leavitt and his SEC were correct to worry about excessive management of reported earnings. Since it appears the managers of Enron devoted most of their imaginative management juices to that form of management in most recent years.

Washington, D.C.: Will the collapse of Enron lead to a backlash to de-regulation, which the Energy sector has enjoyed in recent times? - Jason

Allen W. Williams, Jr.: Whether it will and whether it should are two distinctly different questions. It undoubtedly will put a giddyup into the gait of the movement toward deregulation. After California and then Enron, state house politicians must certainly be very cautious about moving in the direction of deregulation.
But Enron was not directly about deregulation, it was about commodity trading misinterpreted as something less risky, and about over-management of earnings through the use of "hedges" that weren't economic hedges at all, but rather were ways to manage the recognition of losses and debts in transactions that masqueraded quite well as hedges.
Deregulation occurred in state that had very high (relatively speaking) electric rates under their regulatory regimes. Those rates might have been the result of prudent (when made) decisions to build say nuclear power plants, but the only way to reduce those rates (by disallowing those excess costs from rates recovered under the regulatory regime) could lead to the bankruptcy of the utilities. Deregulation in California, Penn, Ill, etc occurred because both the politicians and the utilities were interested in getting out of the high rate thing, and the utilities were avoiding bankrupting cost disallowances. The California deregulation was enacted without any debate, essentially unanimously. That would not happen now. There are no high cost states left.
The FERC, Pat Wood and others there are interested in promoting more deregulation, if only to get more uniformity in the national generation markets - which are now a patch work. Deregulation could promote more technological innovation, and could also put downward pressure on operating costs. But whatever system is promoted will have to assure absolute reliability, or at least hold promise to avoid shortages. That could require rethinking how the capacity cushion above the competitive market formula of supply equaling demand (which means periodic shortage when the unexpected happens)is assured.
Whether Enron will slow deregulation depends upon the political will, and whether all of the problems inherent in reshuffling the energy industry deck are adequately answered in the plans proposed. They could be. And if there is more deregulation the electric commodity market will need traders and arbitrageurs to perform the functions Enron promised to perform.

Montreal, Canada: Where does Enron stand today? What is the net asset value of Enron?

Allen W. Williams, Jr.: It stands in Bankruptcy court, with literally hundreds of creditors and attorneys trying to answer your very question.

Freeport, Ill.: Good Afternoon Mr. Williams,

This whole Enron situation scares me.
As each new piece of information is brought forward it leaves me with a sick feeling in the pit of my stomach. I don't understand how people think they can get away with such deception. I do believe this will be as terrible as Watergate.
Do you feel the same?

Allen W. Williams, Jr.: As I mentioned in another answer, the question is whether this is the work of miscreants, chicanery carried out by business outliners, or is it becoming more of a norm in the business world? If the latter, then there could be systemic concerns.

Troy, Mich.: Is there a law preventing the court from freezing the personal assets of the crooks who cashed in on money that did not even belong to them?

What are the chances that the people of Enron can receive monies from those frozen assets to replace their retirement accounts?

Allen W. Williams, Jr.: It could be ordered and that issue is being argued in at least one court. The injured shareholders have legal paths in the form of shareholder actions and as well class actions arising out of a range of federal and even state laws. If the money is still there, and the defendants are not judgment proof (the money is "gone"), and if the civil actions are successful, then it could be recovered.

Allen W. Williams, Jr.: An issue that seems to be getting only scant attention, perhaps because it is in many respects the type of introspection we choose to deny, is whether greed has become a more driving motivating force that is causing coloring further and further outside the lines. The move to afterburner type officer compensation packages surely helped shake the US economy out of its stagflation doldrums in the 1970's and 80's, but has the pendulum swung too far. Have managers, chasing large stock options that can "flower" in the short run, stressed the integrity of the financial system in their quest for near term income which exceeds ambitious analyst expectations? Is there too much money to be made in the short term by all involved for them to look at, or even consider, strategies intended for the long term? Should stock options be regulated through the tax code in some manner to mitigate the ability of managers to get rich in a boom cycle on options in a company that they later manage into a "bust" experienced by the market at large?

Washington, D.C.: Do you think that federal prosecutors will invoke the RICO laws with respect to Enron?
And aren't insider trading violations enough to warrant criminal prosecution leading to jail time, i.e. Ivan Boesky/Michael Milken?

Allen W. Williams, Jr.: Possibly (there are private civil actions based on RICO as well), and yes insider trading is one of the types of Securities Act violations which can be the basis for Federal wire fraud criminal convictions.

Washington, D.C.: There's one hole in my knowledge of this whole Enron fiasco. Everyone in the press keeps talking about "partnerships" but doesn't explain how these partnerships led to the down fall of the company. Can you explain exactly what led to this demise? It's the only part of this story I can't seem to get my hands around.

Thanks.

Allen W. Williams, Jr.: Exactly would be a tall order. The 215 Powers report tells a lot of the story. Enron was involved in an unbelievably wide range of investment. Some were hard assets, things like power plants (electric), and fiber optic installations. Enron also invested in stock of other companies, some of them internet companies. Enron business also involved trading commodities most recently on the quite successful trading vehicle Enron Online. Enron Online was a place where Enron was the counterparty to every trade. If you sold gas on Online, Enron bought it, If you bought gas on Online, Enron sold it. They took the spread. They could do this without posting cash so long as the Enron balance sheet carried an institutional grade.
The balance sheet became debt heavy as Enron moved into all of these businesses. Also, the investments ran the risk of being volatile in their value. So Enron decided to move them "off balance sheet" so that the debt and fluctuations in value would not affect the credit rating, and the volatility would not negatively affect reported earnings (also bad for the credit rating). Rather than risk taking losses in arms length sales to third parties, and to also preserve the ability to reclaim assets that performed strongly Enron set up a maze of complex partnerships. The partnerships were described as a means to hedge the investments, being a transfer to an independent entity that would take the risk of downward movement in the asset's value in exchange for getting all of the upside value if the asset performed well. But, these entities were not really independent. They were non recourse entities (no personal guarantees) and they were capitalized with Enron Stock sold to the individuals not for cash, but for an IOU. Thus, if the asset went down in value, the hedge would only work if Enron stock remained valuable. Enron was hedging or selling assets to itself, at least that is the conclusion of the Powers report. When the assets in the off balance sheet parking lots went down in value, and Enron stock went down in value, the fat was in the fire. Many of the transactions which had been off the balance sheet were forced to reappear, the level of debt in Enron went up by orders of magnitude, the past reported earnings of Enron had to be restated down by over 22%, and after all of this Enron debt lost its institutional grade. Enron Online, which was the cash cow supporting the rest of Enron and letting it get by with a number of bad investments, could no longer operated when the debt reached junk status and those trading with Enron demanded cash.
Short answer, the balance sheet in retrospect after the Powers Report looked very much like mirrors.

Arlington, Va.: I knew the Chief Financial officer of Enron at some point in the past. Should I fear having to testify? Thanks.

Allen W. Williams, Jr.: The future is murky. Just a take off on the old 8Ball forecasting toy. It really depends.

Silver Spring, Md.: Why hasn't a special prosecutor been appointed to investigate the Enron scandal?
Is the administration just trying to "finesse" its role in this mess?

Allen W. Williams, Jr.: There might be political trappings to this because Enron was so active politically, but there is little evidence of any political shenanigans. Enron did get several exemptions from the federal government (like from the Investment Company Act of 1940 from the SEC) and finessed commodity regulation, but the root causes of Enron don't seem directly related to governmental conduct.

Plano, Tex.: Do you think that the reforms that result from this will address such forms of off the expense statement compensation for executives as stock options? I understand some companies give out billions in such compensation, that isn't reflected on the bottom line income statements at all. Isn't time for a complete review of such practice by responsible adults in place of the proven neglectful accounting industry? Isn't it time it isn't a matter of debate whether a company made money or not?

Allen W. Williams, Jr.: See my comment about options and the extent to which the ability of managers who don't have very much skin in the game might prompt them to gamble over aggressively with Shareholder capital and shareholder risk.

Allen W. Williams, Jr.: Goodbye and thank you for your questions. I enjoyed the session.

washingtonpost.com:

That wraps up today's show. Thanks to everyone who joined the discussion.