ENRON INVESTIGATION

Enron Corporation, the seventh largest company in the United States, abruptly declared bankruptcy on December 2, 2001, and was subsequently discovered to have been involved in a litany of corporate abuses, including deceptive accounting, price manipulation, insider dealing and tax evasion.

Thousands of Enron investors, employees and creditors suffered substantial losses, including through worthless stock holdings, unpaid bills, lost jobs and collapsed pensions. At the same time, most of Enron’s executives walked away with millions of dollars in compensation and stock profits.

In January 2002, Senator Levin, then chairman of the U.S. Senate Permanent Subcommittee on Investigations, initiated a bipartisan investigation into Enron’s collapse. Working as a team, the subcommittee’s Democratic and Republican staffs conducted the most in-depth Enron investigation undertaken by any committee in Congress. The subcommittee reviewed over two million pages of documents, conducted over 100 interviews, held four days of hearings, and issued two reports.

The investigation exposed how Enron used complex financial transactions to dishonestly report better financial results than the company actually experienced, thereby misleading investors, employees, regulators, and others. It also exposed actions taken by the Enron Board of Directors and several major U.S. financial institutions that failed to halt, and in some cases facilitated, Enron's misconduct.

On May 7, 2002, the subcommittee held its first hearing on Enron at which five Enron Board members provided testimony. (View hearings) Two months later, on July 8, 2002, the subcommittee released a bipartisan report containing findings and recommendations regarding the role of the Enron Board of Directors. (View report [PDF] )

The report found that the Enron Board of Directors had failed to safeguard Enron shareholders and had contributed to the company's collapse by allowing Enron to engage in high risk accounting practices, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation.

The report also found that Enron Board members had refused to admit any missteps or take any responsibility for the company's demise. The report presented a number of recommendations to strengthen boardroom oversight and curb excessive compensation, deceptive accounting and other corporate misconduct.

On July 23 and 30, 2002, the subcommittee held hearings on certain transactions involving Enron and three financial institutions, J.P. Morgan Chase & Co. (Chase), Citigroup and Merrill Lynch. (View staff testimony) Each of the transactions resulted in misleading information in Enron's financial statements that made Enron appear to be in better financial condition than it was. The first day of the July hearings looked at more than $8 billion in deceptive transactions referred to as “prepays,” which Chase and Citigroup used to issue Enron huge loans disguised as commodity transactions. The second day of hearings examined a sham asset sale of Nigerian power barges from Enron to Merrill Lynch just before the end of the year, which allowed Enron to claim phony revenue and boost its 2000 year-end earnings.

On December 11, 2002, the subcommittee held a fourth day of hearings focusing on four multi-million dollar structured finance transactions known as Fishtail, Bacchus, Sundance, and Slapshot, involving Enron, Citigroup and Chase. (View hearing) The hearing presented evidence showing that Citigroup and Chase actively aided Enron in executing the transactions, despite knowing the transactions utilized deceptive accounting or tax strategies, in return for substantial fees or favorable consideration in other business dealings.

One month later, on January 2, 2003, the subcommittee issued a bipartisan report detailing the four transactions and calling on federal securities and bank regulators to stop U.S. financial institutions from aiding and abetting dishonest accounting. (View report [PDF] )

The subcommittee’s work contributed to significant corporate and accounting reforms enacted into law by the Sarbanes-Oxley Act and in new procedures adopted by major U.S. businesses. The three financial institutions examined by the subcommittee were also investigated by federal and state authorities, agreed to pay millions of dollars in fines and other payments, and agreed to strengthen their procedures to prevent future participation in client transactions involving deceptive accounting.

Senator Levin is continuing to fight for additional corporate reforms to stop Enron-style abuses, including strengthening penalties for violating securities laws and closing the “Enron exemption” that eliminated federal oversight of energy-related commodity transactions.