Page 2 of 3
Levitt now has Congress' attention, and is in high demand. Andersen looks stupid, and is losing clients. But the rules weren't changed then and are still the same now, so it will be hard to prove that Andersen broke the rules.
Come on, someone involved in this mess must have done something illegal.
At Arthur Andersen, some employees have been shredding documents. If Andersen executives shredded documents after they were informed of the SEC's investigations, then they broke the law. (According to accounting sources, Andersen's claims that shredding client documents is customary are suspect. In accounting, the norm is to keep comprehensive, exhaustive records.)
First off, the government is investigating Andersen's destruction of documents. Destruction of evidence may be easier to prove than the charges that may come later, against both Enron and Andersen. If the government can build an airtight case around shredding, then they can use shredding charges as leverage. An Andersen executive threatened with prosecution over shredding paper can be offered a plea bargain, for example, in exchange for testimony in the more complex fraud case.
Great, so some poor schmoe at Andersen will take the fall for shredding papers, and no one else will be held accountable.
That's one possible scenario, but a lot is riding on the public's reaction. Bush made his first efforts to distance himself from the scandal after a January 26 CBS news poll reported that 6 out of 10 Americans think the administration is hiding something about Enron. Especially during big scandals, politicians are sensitive to the public's reaction, that is, the public without the funds to buy political access. The Enron scandal is just beginning. If the public stays tuned, and expresses its disgust, politicians will be forced to begin the clean up of our system.
What finally happened to bring it all crashing down?
On Octber 16, Enron held a conference call to go over its third quarter. The failure of many of its investments and the debt from its "partnerships" could no longer be swept under the accounting rug. Former CEO Jeff Skilling's sudden departure had attracted additional scrutiny. Enron's chorus of cheerleaders could no longer ignore the sucking sound that had finally become audible, to the tune of a $1.2 billion drop in net worth. The house of cards began to tumble.
Another important factor: Enron had changed. Over time, Enron sank more and more money into risky financial betting, and evolved from an energy company into what the Los Angeles Times called a "massive trading operation in derivatives, which are financial contracts that can entail significant risk." A massive derivatives trading company is a very different animal from something like, say, CalPine, an energy company that also does some trading. The derivatives beast entails a whole new world of risk.
Derivatives allow investors to bet, in effect, on fluctuations in everything from the water supply to energy prices to the weather. Wendy Gramm, the wife of Senator Phil Gramm (R-TX) chaired the Commodity Futures Trading Commission until 1993. While there, she helped make sure that Enron's brand of derivatives trading would be free of government oversight. Weeks after she left that committee, she was offered a lucrative position on Enron's board. Enron was free to calculate its profits as it saw fit, while betting on the weather.
In the end, who got screwed?
Enron's employees, clearly, were hurt the most. As many as 12,000 of them lost their life savings or their entire pension. They were forced to keep a certain percentage of their 401(k)s in Enron stock, and encouraged to invest solely in Enron. In the last few months, just as the share price was tumbling, Enron management switched pension plans and froze employee accounts. Employees watched in horror, their hands tied, as the stock lost most of its value. Illegal? Employees are suing, and intend to find out.
Who else got screwed?
Thousands of American investors have lost money on Enron stock, individually and through outfits like the Osprey Trust, an Enron entity that financed some of the company's sketchy partnerships and investments abroad. Over 50 mutual funds and insurance companies invested $2.4 billion dollars in the trust, which then lost most of its value. And don't forget investors and power plant workers in Brazil and India. Enron's reach is broad. Oddly, even K-mart employees can claim Enron victim status: K-mart's bankruptcy may have been precipitated in part by the Enron collapse (the collapse raised the price of a type of insurance called surety bonds).
A handful of reporters and analysts are now finding themselves in the spotlight due to skepticism they expressed anywhere from a few months to a year ago, back when no one would listen.
