Corporation Member Testifies on Enron

Harvard Corporation member Herbert S. “Pug” Winokur Jr. ’64-’65 testified yesterday afternoon before the House Committee on Energy and Commerce about his role in the collapse of energy trading giant Enron Corporation.

It was the first time that Winokur, who testified alongside former Enron CEO Jeffrey Skilling and fellow Enron board member Robert K. Jaedicke, has spoken publicly about Enron since the company’s downfall.

Winokur’s opening statements focused largely on a report published by Enron’s special committee for internal investigatison. Winokur was a member of the committee but was not involved in the investigation of the board of directors, on which he also served.

He took issue with the report’s finding that the board bore responsibility for Enron’s demise by creating and failing to properly oversee affiliated companies, particularly LJM Investments.

Andrew Fastow, the former chief financial officer of Enron set up and was the manging partner of LJM, named for the initials of his wife and children.

LJM became involved in a number of complicated business deals which hid Enron debt from its investors and benefited Fastow financially.

When LJM began to fail and investors became worried about Fastow’s dealings with Enron and LJM, Enron was forced to cut ties with the company and take a loss of $1 billion, which contributed to the company’s Dec. 2 bankruptcy filing.

“The board made a reasonable business judgment to permit Mr. Fastow to serve in these partnerships,” Winokur said yesterday. “We believed those transactions would be in the best interest of Enron and its shareholders... I must therefore respectfully disagree with some aspects of the report relating to the board’s performance and corporate governance principles.”

Minutes from a 1999 Enron board meeting show that Winokur played a prominent role in approving the creation of LJM2, an off-shoot of LJM. The minutes show that Winokur was the one who proposed a motion to overrule a company policy that would have prohibited Fastow from forming LJM2.

In the hearing, Winokur took a secondary role to Skilling, who faced the brunt of the inquiry, but two hours in, Rep. Bart Stupak (D-Mich.) began questioning Winokur about the approval and oversight of LJM.

When Stupak asked Winokur if the board was aware of the conflict of interest controlling LJM represented for Fastow, Winokur answered that the conflict of interest was known, but that safeguards were prepared to make sure that all of Fastow’s actions were ethical.

Stupak then drew attention to a previous statement of Winokur’s that Skilling was responsible for such oversight and had reported to the board that all safeguards were in place and working.

When Stupak asked what Skilling had reported to the board, Winokur replied that “we were told by people, with Skilling present, that those duties were being discharged.”

Stupak asked again, “What did [Skilling] report to you?”

After a moment Winokur answered, “Congressman, I don’t remember a specific report by Mr. Skilling….there was not an instance where he reported to me personally.”

“So,” said Stupak, pointing to a copy of the statement, “at least this line and a half here, that’s not correct?”

“I believe I’ve tried to answer that question,” Winokur replied.

Stupak finished the exchange by retorting “So, speak no evil, see no evil, hear no evil?”

Rep. Diane DeGette (D-Col.) also said she wondered how Enron’s board of director’s could have failed to oversee Enron’s financial deals.

At the end of the hearing, Winokur continued to assert that Enron’s board was misled. He said his greatest regret was that the board had not been warned about the company’s problems before it collapsed.

“Nobody came to the board until August when it was very late,” Winokur said. “Not one person came to the board and said ‘we are uncomfortable here, we are uneasy.’”

—Staff writer Joseph P. Flood can be reached at flood@fas.harvard.edu.