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Douglas Jehl . NY Times . 21 january 2002

The White House disclosed today that Kenneth L. Lay, chief executive of the Enron Corporation and a leading financial supporter of the Bush presidential campaign, had contacted two Cabinet members a few weeks before the giant energy company's collapse to warn of its growing difficulties.

The disclosure followed the Justice Department's decision late Wednesday to form a special task force of prosecutors from across the country to conduct the inquiry into the company's downfall.

Today President Bush directed the Treasury Department and other agencies today to examine how to protect pension plans from debacles similar to Enron's collapse. But that move appeared aimed in part at containing the political damage from Enron's demise.

Attorney General John Ashcroft, another beneficiary of Enron's campaign contributions when he was senator, said today that he would not take part in the Justice Department's investigation of Enron.

And adding to the day's turmoil, Arthur Andersen L.L.P., which audited Enron's financial statements, disclosed this afternoon that it had destroyed "a significant but undetermined number of electronic and paper documents" related to the company.

Enron's collapse, which came on Dec. 2 in the largest bankruptcy filing ever, virtually wiped out the stakes of its shareholders and eliminated millions of dollars in investments held in the pension plans of the company's employees.

Ari Fleischer, the White House spokesman, said today that Mr. Lay called Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans in October to advise them of Enron's deterioration and suggested that government intervention might be needed to protect the company's bondholders. Mr. Fleischer said that Mr. Lay told Mr. O'Neill that his company was heading into bankruptcy and that he told Mr. Evans that Enron might default on its bonds.

Mr. Fleischer said Mr. O'Neill and Mr. Evans decided not to intervene, and they did not discuss the calls with Mr. Bush.

Mr. Bush said that Mr. Lay did not contact him to discuss the company's financial crisis and that he had not seen the Enron executive since last spring.

The president said Enron's collapse raised considerable questions about the rules for pension plans and corporate disclosure.

"One of the things that we're deeply concerned about is that there has been a wave of bankruptcies that have caused many workers to lose their pensions," he said.

The president said he directed the Treasury Department, along with the Commerce and Labor departments, to examine the rules for pension plans and 401(k) plans and propose revisions to protect employees from losing their savings in a corporate bankruptcy.

In addition, Mr. Bush said he had directed Treasury Secretary O'Neill and other government officials to form a working group to examine the rules on corporate disclosure. The group would include officials from the Securities and Exchange Commission, the Federal Reserve and the Commodities Futures Trading Commission.

Meanwhile, Mr. Ashcroft removed himself from the Justice Department investigation of Enron because of his relationship with the company. Enron contributed to Mr. Ashcroft's failed Senate reelection campaign in Missouri in 2000.

"The attorney general has not been involved in any aspect of initiating or conducting any investigation of Enron," the Justice Department said in a statement.

David Ayres, Mr. Ashcroft's chief of staff, also recused himself.

The department said Larry D. Thompson, the deputy attorney general, would be responsible for the investigation.

The Justice Department, as well as the Securities and Exchange Commission, also learned today that Arthur Andersen, the Enron auditor, had destroyed documents related to the company. The accounting firm said it was also notifying Congressional committees and other agencies investigating the Enron collapse that the documents were missing.

"In recent months, individuals in the firm involved with the Enron engagement disposed of a significant but undetermined number of electronic and paper documents and correspondence relating to the Enron engagement," the firm said in a statment.

The circumstances surrounding the document were not immediately clear. Andersen said its company policy "required in certain circumstances the destruction of certain types of documents."

But Andersen said millions of documents related to Enron still exist, and it has retrieved some of the deleted electronic files. Andersen said it is continuing retrieval efforts through electronic backup files "and is continuing in its efforts to fully learn and understand all the facts related to this issue."

Questions about Enron, and this morning's disclosure that its chief executive had reached out to two Cabinet secretaries, dominated the midday news briefing by Mr. Fleischer.

"It's appropriate to take a look at what led to the bankruptcy of Enron," Mr. Fleischer said. He expressed the hope that any Congressional inquiry would be even-handled, not a "partisan, politically charged investigation" of the kind that he said had so soured many Americans on Washington.

Mr. Fleischer rejected any suggestion that the Treasury or Commerce secretaries should have informed the president of their conversations with Mr. Lay or told the Securities and Exchange Commission what they knew of Enron's weakness. He also rejected any suggestion that there was any attempt to keep Mr. Bush "out of the loop" on Enron matters.

The spokesman said there should be no rush to judgment about Mr. Lay's contacts with Mr. O'Neill and Mr. Evans "as if there's something wrong inherently with contact and communication — and there is not."

Some Democratic staff members on Capitol Hill could barely contain their glee today. "This is the perfect storm," said Lou Schilero, the press secretary for Representative Henry A. Waxman of California. "It's the biggest bankruptcy in American corporate history — a bankruptcy where a small number of executives enriched themselves to the tune of hundreds of millions of dollars while thousands of employees were left with worthless stock. And in 2001, Enron is the most influential company in Washington. When you piece it all together, there are many questions that need to be answered."

The White House decision to review the rules on pension plans and corporate disclosure came a day after the Justice Department widened the potential scope of the criminal investigation into Enron.

The broadened inquiry, however, is likely to reduce the burdens going forward on Enron, which has been struggling with the demands from multiple civil and criminal investigations. By consolidating the criminal investigations, the company will have only one coordinated group of prosecutors seeking information, decreasing the potential demands for documents and limiting the number of officials to persuade of its position.

Shares of Enron fell 12 cents, or 15.1 percent, to close at 67 cents today on the New York Stock Exchange. The bankrupt company's stock trades at just a fraction of its all-time high of $90.75, reached on Aug. 23, 2000.