U.S. Launches a Criminal Probe of Enron
The Justice Department said Wednesday that it is launching a wide-ranging criminal investigation of Enron Corp., whose sudden collapse shredded billions of investor dollars and cost thousands of jobs.
Justice officials took the rare step of disclosing the existence of the criminal investigation, saying they will create a task force at department headquarters that will bring in federal prosecutors from Houston, New York, San Francisco “and probably other places” to work with senior administrators in Washington, one department official said.
“We usually don’t discuss investigations, but this is a case of national significance,” said the Justice Department official, speaking on condition of anonymity.
“It is like the Microsoft case in that regard--a national case,” added the official, referring to the high-profile civil antitrust probe of the Redmond, Wash.-based software giant. “Because of the diversity of [Enron’s corporate] offices, we wanted to centralize the investigation in order to coordinate efforts on all fronts.”
The investigation signals further trouble for Houston-based Enron, once the world’s largest energy trading firm. Enron, a darling of Wall Street, saw its value plummet in just a few weeks last year, culminating Dec. 2 in the largest bankruptcy filing in U.S. history.
Enron’s collapse threw thousands of people out of work and cost them--and investors--billions of dollars. Employees were blocked from selling shares in their retirement accounts because Enron was in the middle of switching plan administrators. But top company executives previously had sold their company shares at hefty profits.
Justice Department officials said they want to know whether there is any criminal culpability on the part of corporate officers and others. The points of inquiry will include whether the company knew about problems but never disclosed them and whether key financial records were altered, as well as other potentially illegal acts, the department official said.
The head of accounting firm Arthur Andersen, Enron’s auditor, testified last month before a congressional panel that Andersen warned Enron directors that the energy company might be guilty of “possible illegal acts” for withholding key financial information from Andersen auditors. Enron sharply disputed the claims.
Illegal insider trading by Enron executives and directors was alleged in a lawsuit filed last month by a bank that manages union retirement funds. Amalgamated Bank accused company executives of using inside information to sell stock and reap $1.1 billion in profits.
The Justice Department investigation could take years to conclude and involve hundreds of subpoenas, depositions, interviews and a complete scouring of the firm’s financial records, authorities said Wednesday night.
Course of Inquiry Garners Approval
White House spokeswoman Jeanie Mamo said President Bush had been briefed on the investigation Wednesday and supported it.
“The president is concerned about Enron’s bankruptcy and thinks it’s important and appropriate for relevant government agencies to investigate as they see fit,” Mamo said.
Enron referred inquiries to its Washington lawyer, Robert S. Bennett, whose clients have included former President Clinton. Bennett said he is glad the Justice Department has consolidated what appeared to be separate inquiries from various offices.
“We are going to fully comply with this investigation,” Bennett said. “It’s important that the Washington scandal machine not take over, which would have as a consequence that every move would be politicized and the facts would be trivialized.”
The probe will be headed by the Justice Department’s criminal division with assistance from its civil fraud unit and investigators from the FBI, other federal law enforcement agencies and perhaps the Securities and Exchange Commission, Justice Department officials said.
Already, Enron is embroiled in several lawsuits and is the subject of congressional investigations as well as probes by the SEC and the Labor Department.
Current and former Justice Department officials characterized the investigation as significant and somewhat unprecedented in that “main Justice” task force probes are usually saved for national issues such as the rash of church arson fires in recent years and the flurry of failures of savings and loans in the 1980s.
“It’s unusual. In the recent past, I am hard pressed to come up with another task force looking into a single entity or individual,” said Eric H. Holder Jr., deputy attorney general in the Clinton administration. “It is clearly an indication that the department is taking this very seriously.”
“One of things you can certainly draw from this is that some threshold has been crossed and clearly there is some belief that there is a predicate for a wide-ranging investigation,” Holder said. “It is a reflection of, and an indication of, the complexity and breadth of the case.”
Another former senior Justice Department official familiar with such task force investigations said that “running this out of ‘main Justice’ suggests that it is something that is so large and so wide-ranging that they know they are going to have a hard time getting their arms around it.”
Dramatic Rise, Fall of Power Firm
For weeks, Justice Department investigators have been involved in preliminary inquiries into the Enron collapse, asking questions, conducting interviews and deliberating over whether a full-scale investigation was warranted.
Justice Department officials would not say when the decision was made to launch the full-scale probe, or whether Atty. Gen. John Ashcroft was involved in those deliberations. And they said such an investigation does not necessarily indicate a belief that criminal wrongdoing was committed, only that the issue merits a thorough review.
Authorities said it is likely that a federal grand jury will be used to issue subpoenas and, later, to hear testimony.
One former Justice Department official said all actions of the company’s executives will come under scrutiny.
“What did senior officials know about the downfall of the company in advance that led to them divest themselves when the rest of the company was locked in?” asked the official. “What kind of cooking of the books was done, if any? Did they mislead employees, investors and Wall Street about how solid the company was financially?”
Enron’s fall was even more dramatic than its aggressive push to the top of the energy industry. Its stock traded for $90 a share in late 2000 but on Wednesday sold for a mere 79 cents on the New York Stock Exchange.
From its roots as a small natural gas pipeline operator, Enron grew to become the world’s largest energy-trading operation. Until a few months ago, it was handling one of four wholesale deals for electricity, gas and other energy products.
Enron championed the deregulation of energy markets and tried to influence the way California structured its energy markets and then steered through its electricity crisis. Enron and its chairman, Kenneth L. Lay, wielded enormous political influence, pushing to successfully replace the head of the Federal Energy Regulatory Commission and aiding in shaping the Bush administration’s energy policy.
Vice President Dick Cheney or members of his energy task force met with Enron executives six times last year, according to a White House letter released Tuesday. Enron’s financial problems were not discussed, the White House said.
Enron began to crumble in mid-October when it revealed surprise losses from bad investments in telecommunications and water ventures as well as a $1.2-billion drop in shareholder equity associated with partnerships run by company employees.
Enron then admitted that, after accounting for losses in other off-balance-sheet partnerships, it had overstated its financial strength and that investors should no longer rely on more than four years of income and other financial data.
Investors fled Enron, and the company ran into a massive cash crunch that led it to seek a rescue from its smaller rival and Houston neighbor Dynegy Inc.
Dynegy later pulled the plug on its $9-billion merger with Enron, saying the company had not revealed the depth of its financial problems. Enron then filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code, citing more than $31 billion in debt.
Chapter 11 allows a company to continue operating while it works out a plan to pay its creditors. Enron is expected to auction its core energy-trading business this week and has agreed to let Dynegy buy a valuable natural gas pipeline.
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Meyer reported from Washington, Rivera Brooks from Los Angeles.
