Archives>ENRON> Ex-Official Says Enron Employees Shredded Papers

Ex-Official Says Enron Employees Shredded Papers
JONATHAN D. GLATER and MICHAEL BRICK . NY Times . 22 january 2002

An Enron executive, Maureen Castaneda, saying in an ABC television interview that employees shredded documents as recently as last week.

Enron employees were shredding documents at the company's Houston offices as recently as last week, a former executive said yesterday. Her statement was the first indication that documents were destroyed at Enron amid investigations of the company's collapse by Congress and the Justice Department and followed reports of document shredding by accountants at Enron's auditor, Arthur Andersen.

The company said last night that it was looking into the claims by the executive, Maureen Castaneda, who was Enron's director of foreign exchange and sovereign risk management. Enron said that it had repeatedly directed workers to preserve all documents once it learned in October that the Securities and Exchange Commission had begun an investigation of its accounting practices.

Lawmakers investigating Enron's collapse and former prosecutors said that evidence of document destruction would play a central role in Congressional and criminal inquiries into the company's fall.

"If anyone in Enron, or for that matter Arthur Andersen, is shredding documents that have anything to do with this entire matter, they are going to be in a whole lot of trouble," said Representative James C. Greenwood, Republican of Pennsylvania, who is chairman of a House subcommittee that will hold a hearing Thursday into shredding by Andersen. Ms. Castaneda described the shredding by Enron employees on ABC News last night.

As for Arthur Andersen, an internal document shows that as early as November 2000, the accounting firm had concluded that Enron's Internet services unit, which the company considered crucial to its growth, had such poor controls that there was a "high risk" that its financial results would be misrepresented.

Andersen continued to sign off on the results, and the performance of the unit, Enron Broadband Services, rapidly deteriorated with the bursting of the Internet bubble. After losing $60 million in all of 2000, the unit reported losses of $494 million in the nine months that ended last Sept. 30.

The stock market's decline as the air went out of the new-economy boom apparently also took a harsh toll on the finances of Kenneth L. Lay, Enron's chairman. Though he received more than $200 million in compensation and profits from exercising Enron stock options over three years, Mr. Lay was forced to borrow millions more from the company last year to meet his obligations.

In a telephone interview yesterday afternoon, Ms. Castaneda said that document shredding at Enron began before Christmas and continued through last week.

Ms. Castaneda said that employees in Enron's accounting department, which had offices across the hall from her own on the 19th floor of an Enron office tower, collected about 15 boxes of documents after Thanksgiving. She watched as the department employees searched through the boxes, Ms. Castaneda said, and later noticed that shredded paper was accumulating in trash bins.

"I can't tell you what they were searching for, but they were definitely interested in picking out certain documents," Ms. Castaneda said.

Robert S. Bennett, a lawyer representing Enron, said that the company was investigating the reports of shredded documents.

"In October 2001 the company issued several directives to all Enron employees worldwide that all relevant documents should be preserved in light of pending litigation," Mr. Bennett said. "If anyone violated those directives, they will be dealt with appropriately."

The company said that it had sent employees four e-mail messages on document retention since Oct. 25, most recently last Monday.

Legal experts said it would be a crime deliberately to destroy documents that might be sought by the S.E.C. or other government agencies.

"It is really dumb," said Michael J. Shepard, former chief of the special prosecutions division in the United States attorney's office in Chicago and now a partner at Heller Ehrman White & McAuliffe in San Francisco. Destroying documents makes it very difficult to argue that their content was not incriminating, he said.

"Maybe," he said, "the document says, `Man, did we cheat, and the roof is about to fall in.' Maybe the document is really, really bad. But in a lot of cases, it can be better to have the documents because you can explain them."

Another former Enron employee, who asked not to be identified, said yesterday that she witnessed two to five people shredding documents in a room in late November or early December.

The former employee was unable to identify the people and said she had observed them only casually. She added that she was not aware of any orders not to shred documents but said that several Enron employees later indicated that they had also seen the shredding taking place.

Ms. Castaneda said that she collected a box of shredded documents at the suggestion of G. Paul Howes, an investigator for the law firm of Milberg Weiss Hynes Bershad & Lerach, which has filed a suit against Enron and its officers and directors on behalf of investors.

The shredded pages include accounting records, expense reimbursement requests, wire fund transfer requests and what appear to be insurance records. Some of them are dated after Enron said it sent out notices about preservation of documents, and some include the words "post-petition," which Mr. Howes said suggested they were related to the company's bankruptcy filing.

Some of the shredded strips have the names of secretive partnerships — JEDI II and Raptor — that have been linked to transactions allowing Enron to keep some of its debt hidden from investors.

Bill Lerach, a partner at Milberg Weiss, said last night that he planned to take the box of shredded documents before a judge in Houston today and ask that other Enron documents be taken into the custody of the court immediately.

Congressional hearings begin on Thursday before both the Senate Governmental Affairs Committee and Mr. Greenwood's House Energy and Commerce subcommittee. The House hearing will focus on the admission last week by Andersen that employees in its Houston office destroyed thousands of Enron documents shortly after learning that the S.E.C. was investigating Enron.

Last week, Andersen fired the lead partner on the Enron audits, David B. Duncan, saying that he orchestrated the shredding. Mr. Duncan has told investigators that he was following a directive from a lawyer in Andersen's home office in Chicago, Nancy Temple, who in an Oct. 12 e- mail message re-emphasized the firm's document-destruction policy. Mr. Duncan has told investigators that it was "unusual" for the firm to re-emphasize that policy, according to people close to the investigation. Officials with the House subcommittee said Ms. Temple was likely to testify Thursday.

In his interview with investigators, Mr. Duncan also attributed some blame for accounting errors to himself, Mr. Greenwood said. Mr. Greenwood said his staff members had told him that "the bottom line" from Mr. Duncan's testimony was that "he did not point the finger at Enron, and he did not claim that Enron hid information from him."

"Our hearing will be focused on the destruction of documents," Mr. Greenwood said. "Did Arthur Andersen destroy documents strictly pursuant to its normal protocol, or was there an aggressive attempt to destroy documents to cover up? These are the questions we need to get to in our hearing."

The analysis by Andersen of Enron Broadband Services examined the company's efforts to limit the financial risk in 10 of the unit's business areas. The report found that half of the areas reviewed had inadequate financial control; the other half were rated "satisfactory." None of the areas received the next highest rating, which was "good."

The Andersen report, in many passages, is critical of the Enron management's ability to keep track of the unit's financial commitments, saying that the company lacked many of the formal procedures that would allow its top officers to spot problems early.

An Andersen spokesman declined to comment, saying he did not have a copy of the report. Mark Palmer, an Enron spokesman, said that since Andersen served as the company's internal auditor, it was the accounting firm's responsibility to detect trouble spots in Enron's financial controls.

"As part of that job, they would offer suggestions on how to fix any problems that they found," Mr. Palmer said.

Even as the market for broadband capacity and services collapsed in 2000, Enron Broadband reported significant gains from equity investments in other companies, sales of fiber optic cable among a group of partnerships affiliated with Enron, and other transactions.

But in November, when Enron restated its earnings going back to 1997, that performance proved illusory. The division's year-end loss of $60 million climbed to $357 million by the third quarter of 2001, according to S.E.C. filings.

The Andersen analysis found that for its investments in projects involving large cash commitments in fixed assets, like a fiber optic network, Enron Broadband's "current conditions indicate informal processes, lack of overall communication and coordination and monitoring controls."

Andersen, which rated the controls for capital projects as "inadequate," wrote that there was no formal policy at the company for approving such investments, and that there was no management process in place to track the status of projects after they began.

The Andersen report also found controls in numerous other areas inadequate. It cited deficiencies that prevented the company from identifying and disposing of obsolete inventory. It also found that the company historically bought services without proper authorizations or documentation. All told, the report says, the division had no formal procurement policy.

Even in the areas where the financial controls were rated as "satisfactory," shortcomings were found, according to the Andersen report.

In the division's merchant investing business, the report said that Enron executives responsible for placing a value on possible investments were not always consulted before a decision was made to commit the company's money.

Moreover, the report said, policies to prevent employees from profiting on their knowledge of the division's decisions were inadequate.

The report contains a long list of "management action plans" to address the problems. But the plans, all of which are labeled "tentative and preliminary," failed to impose the controls that the division needed, former executives said.