Friday, 4 April 2003, 12:09 am
Column: Catherine Austin Fitts
Mapping the Real Deal…
The Real Deal About Enron
… an interview with Scoop Real Deal Columnist Catherine Austin Fitts
Part Two Of Seven Parts
Originally Published By Sanders Research Associates
If my years working on the clean up of BCCI and the S&L crisis taught me one thing that I would communicate today to the shareholders, retirees and employees who have been harmed, it is this: people like those on the board of Enron absolutely make money from insider trading, bid rigging and fraud, and they do so with help from the highest levels.
— Catherine Austin Fitts.
IMAGE: Enron
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In Part One, we introduced the subject of this interview Catherine Austin Fitts and described some of her experiences in taking on the criminal powers who lie behind the modern U.S. Governmental apparatus.
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INTERVIEW TRANSCRIPT BEGINS
DA: In 1989 and 1990, Catherine, you worked for HUD Secretary Jack Kemp in the first Bush Administration. Kemp was a member of the oversight board for the Resolution Trust Corporation (RTC) that was set up for the S&L cleanup. Part of your responsibilities at HUD was to provide regulatory support to Kemp and to the RTC people and its operation, regarding mortgage and property disposition. Also, between 1994 and 1996 you served as a board member of First American Corporation, after former New York Banking Commissioner Harry Albright was appointed Trustee of the First American Resolution. You were there to assist in selling First American financial assets and unraveling its BCCI connections.
CAF: That’s correct. I was initially brought into the Bush Administration to ensure that the Federal Housing Administration (FHA) at HUD was sound and to help clean up the IranContra Fraud at FHA/HUD. There were also fraud issues related to regulatory responsibility in the Freddie Mac, Fannie Mae, Federal Housing Loan Bank system, and the U.S. mortgage market—that dovetailed into the S&L work. After I left HUD, I became a board member of Carteret Savings & Loan to help some old partners with more S&L clean up. Since my days at Dillon, Read, I had a reputation for successfully reengineering financial situations that others thought were hopeless.
DA: Beginning in 1996, your company Hamilton Securities, Inc, which was on a competitive contract with HUD as a financial advisor, was sued by HUD contractor Ervin Associates and then investigated by the Department of Justice for alleged insider trading, bid rigging, fraud, and conflicts of interests. No basis was found to support any of those allegations by their investigators in 1996, then again in 1999, and finally a year ago, they dropped all investigations. Those allegations against Hamilton are similar to those filed against Enron Corporation. So not only have you been part of the clean up of several large and complex fraud cases, but you have also been on the receiving end of a DOJ investigation—on allegations not terribly different than those in the Enron case. Additionally, you were a member of the SEC’s Emerging Market Advisory Committee from 1990 to 1993. Clearly, you must have a pretty good sense of corporate law and first hand knowledge of what goes on in government fraud investigations. I know from articles you have written that you are not fully convinced the investigation of Enron is in good faith—also that you feel a lot of mistakes and omissions were made in the way the DOJ initiated its investigation. Can you explain some of this?
CAF: There are seven steps that should have been taken if the federal intelligence, investigation, regulatory and prosecution agencies were serious about stopping the Enron fraud, getting our money back and holding guilty parties accountable. All seven are based on two fundamental principles that you always see working when prosecutors and investigators are doing a competent job. The first fundamental principle is: Make sure you have control of all the data and information about money and how that money is used in the organization. The second fundamental principle is: Make sure you use that control—of the data and information—to gain control of any cash that was stolen or wrongfully used. Let me emphasize at the outset that Enron’s management and board of directors and their accountants and banks have admitted to securities violations, gross negligence, sham transactions, and obstruction of justice. So let’s not skirt the issue: we have a self-proclaimed criminal enterprise. I believe that Enron was also engaged in additional financial fraud and money laundering.
DA: Michael Kopper, the first Enron employee to be arrested, pleaded guilty to one count of conspiracy to commit wire fraud and one moneylaundering charge in late August of this year. [1]Is this what you mean by additional financial fraud?
IMAGE: One Of The Little Guys
CAF: This is just the narrowest sense of what I was suggesting. I will expand upon that as we go along. The first thing a serious investigation, regulatory and enforcement effort does is to establish control of both the records that document how the money works and the cash. It helps to compare financial fraud such as Enron participated in to a game of basketball. The ball is the cash and you want to keep your eyes on the ball at all times. Keeping that in mind, let’s walk through the seven steps of what a competent investigation and prosecution effort should have done. The first step is to get control of all the documents. By all the documents I mean all the papers and digital records of Enron and its 3,000 subsidiaries and special purpose entities that inform “how the money works”, both onshore and offshore. You also make sure you get control of all the Enronrelated records at their banks, auditors and other vendors, both onshore and offshore. It’s impossible for us to tell, from where we are, the exact extent of the subpoena or other discovery actions that have been taken, but clearly there’s a great deal that has not been done, particularly offshore, just based on the public record.
We know the government permitted extensive shredding of documents by Arthur Andersen and Enron, something that is incredibly disturbing because it proves that months into an investigation, the SEC and DOJ chose not to assert the initial control that was essential to the success of any such investigation.
DA: And, in your case with Hamilton Securities, an instance where government auditors later verified your innocence, the DOJ wasted no time, seizing your office, your records, and your cash.
CAF: Yes. To me this is the big giveaway. The DOJ simply did not take timely control of Enron’s documents. In Hamilton’s case, DOJ and their informant were responsible for destroying the digital infrastructure of a company whose operations and equity value was dependent on those databases, software tools, and documentation. They took extreme measures to get control of all digital and paper records—even when their own investigators had documented there was no need. In Enron’s case, the DOJ politely skipped over all of this— and the second step in an investigation: you never allow the transfer of assets before you assert the appropriate controls. And yet we’ve seen the government readily permit the transfer of Enron Online to the Just one of the little guys Union Bank of Switzerland (UBS), one of Enron’s largest creditors. So now it’s very possible that a great deal of information that would be needed for a proper investigation is under the protection of the privacy laws of a Swiss bank.
DA: As I understand it, Citigroup and MorganChase, who have both been mentioned in the Enron web, were also part of the bidding process for Enron Online that took place in January of 2002. [2]
CAF: Yes, one would expect that. Like UBS, they were major Enron creditors. But what’s interesting, and perhaps quite significant to note, is that a recent addition to the UBS board is Lawrence Weinbach, a former chairman of Arthur Andersen, the accounting firm that shredded Enron documents. DA: I saw that. Lawrence Weinbach had been the CEO at Unisys since 1997. Prior to that he spent nine years as managing partner and chief executive for Andersen Worldwide—which includes Arthur Andersen where Weinbach began his career in 1961. [3]UBS announced Weinbach as Chairman of their Audit Committee Board on February 22 of 2002. [4]UBS bought Enron’s North American wholesale electricity and natural gas trading business on January 18, 2002. [5]The timing is certainly curious.
CAF: Enron was also permitted to sell and transfer its gold bullion and gold derivatives trading operation. Understand that to be able make these two sales and transfers of Enron Online and the gold operations, as quickly and quietly as they were, in the middle of an initial bankruptcy filing, was nothing short of miraculous based on what I’m told by bankruptcy attorneys. In combination with the illegal shredding, it would have permitted the coordination of the cover-up of possible money laundering or financial fraud between the banks and Enron Online. These sorts of things will be easier to keep hidden because one of the creditors and trading partner banks now controls what is probably the most likely guilty entity. Thus the ability of any prosecutor to play the banks and the target off against each other in the discovery and investigation process is diluted or lost.
DA: So the government allowed the transfer of assets in a way that may prevent access to the documents and personnel necessary for a successful investigation and recapture of stolen monies. Does this also mean that the bank records can be coordinated with Enron Online discovery behind the protection of attorney client privilege?
CAF: It would appear that way. Sales and transfers of assets have proceeded without complete and timely federal control of paper and digital records, including computers and all data storage devices. Unlike Enron, Hamilton did not shred documents and provided redundant copies of records and back up computer tapes to counsel who provided assurances to the federal government that no originals would be destroyed. The documents sequestered by Hamilton included records of all subsidiary entities.
DA: In these first two steps, controlling records and assets, above and beyond collecting Arthur Andersen’s documentation, communication with Enron’s banks surely must be a critical part of this initial process. We’ve already mentioned MorganChase and Citigroup as Enron creditors. But there is a specific accusation that senior credit officers at Citigroup manipulated records to hide a $125 million Enron debt to Citigroup.[6] From what I’ve read, it’s unclear if the federal investigators will fully pursue this. But don’t the banks have to be largely involved? Compliant, perhaps complicit, to the point of assisting?
CAF: Indeed, both Citigroup and J.P. MorganChase, Enron’s two lead banks, were called to task and to testify before the permanent subcommittee on investigations of senate government affairs committee on July 23rd . Both banks had been verified as complicit in creating “special purpose entities” (SPEs) to round trip transactions as a way to loan money to Enron without calling it a loan. In the course of this maneuver, Enron and its trading as well as lending partner, MorganChase, created the façade of a business/trading activity as opposed to a borrowing activity thereby falsely boosting their revenues. While both banks denied this, the testimony and documents provided to the Senate, clearly support the Senate’s position—making this even more egregious and suggesting the banks themselves created and controlled the SPEs.
DA: On September 13th a federal judge dismissed MorganChase fraud claims against its insurers, perhaps, preventing the bank from collecting $935 million in loses on gas and oil trades with Enron. [7] Then in its own defense, MorganChase attorneys argued, incredibly, that the insurers knew the deals were shams intended to hide loans to Enron. What does all this doubletalk by MorganChase mean?
CAF: That we need to know if Enron or, at least, Enron Online was essentially a SPE for New York Fed member fraud and money laundering. This brings us to a question critical in getting to what was really going on at Enron—the part outside investors played in the Enron game. We can get to that from the third step of our investigation. You always get document and cash control, if you can, before a bankruptcy filing.
DA: Enron filed for bankruptcy protection on December 2nd. [8]
CAF: Yes, Enron filed for bankruptcy before the feds asserted control, and well after numerous members of the Bush Administration were informed that Enron was teetering on the verge of collapse, and after what appears to be many efforts by the administration to help them keep going, and long after SEC investigations had begun. When Enron filed for bankruptcy, its own board worked over a fourmonth period to “investigate what went wrong.” This was only possible because of DOJ complicity at the time. And this is important. A bankruptcy filing gives Enron additional powers and rights to protect themselves, particularly from the class action lawsuits that, on a private basis, could dig out some of the data about how the money worked and those bank relationships you brought up—even if the DOJ and SEC don’t succeed in digging this out or are, in fact, covering it up.
DA: What you’re saying is, yes, an investigation is going on, but as congressional investigators slowly stumble through the testimony—it’s been a year now, they have given Enron a chance to work over or obliterate the evidence. And you feel this is deliberate?
CAF: It looks that way. Enron’s bankruptcy filing created a stay against all suits against Enron. Those directed at board members and management could proceed. Hence private discovery of Enron’s records may be limited. Watching this process, my question is did the DOJ specifically help Enron get into bankruptcy, and define their investigations, so as to protect the information from class action investigation?
IMAGE: What’s In The Box?
ENDNOTES:
1. J.P. Morgan Loses Round One
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