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<nettime> from the dotcom observatory
geert on Sun, 31 Mar 2002 04:29:23 +0200 (CEST)

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<nettime> from the dotcom observatory

Dear Nettimers,

as I wrote in last month's report, it's busy as never before, here at the
dotcom observatory. The Enron affair is extending to the telcos Global
Crossing and WorldCom. The consulting industry worldwide is facing a
legitimacy crisis and might be split up or regulated in one way or another.
As you can read below, a lot of good investigative journalism is being done
at the moment (two or three years late, perhaps?). There is for sure more to
come. This leaves us with the question of possible longterm consequences. As
many have already poited out, accounting and auditing goes to the very heart
of global capitalism. However, there is no general feeling of crisis in
sight. Or is there? The Enron-Andersen affair cannot easily being repaired
by spin doctors. There is no dip in public relations which can quickly be
restored. On the other hand, the (global) economic recession might come to
close somewhere late this year and then everything will, again, be
forgotten. In any case, prepare yourself for a good read. It's all amazing
material. I had already forgotten the hilarious story of Enron's fake
trading room...

Ciao, Geert


1.  Thomas Frank: Shocked, Shocked! Enronian Myths Exposed (The Nation)
2.  Global Crossing defends its accounting (Reuters)
3.  Kevin Drawbaugh: Congress Asks Analysts About Enron (Yahoo)
4.  Richard Oppel: The Man Who Paid the Price for Sizing Up Enron (NYT)
5.  Personal Responsibility for the Corporate Elite (Mokhiber and Weissman)
6.  Jimmy Guterman: Andersen Called to Account (Media Unspin)
7.  Moises Naim: The Creative Destruction of Enron (Financial Times)
8.  Scott Berinato: Enron IT, A Tale of Excess and Chaos (cio.com)
9.  Robert Trigaux: Being duped is now all the rage (St. Petersburg Times)
10. Enron Designed Fake Trading Floor (click2houston.com)
11. JP Barlow fight the content industry (news.com)
12. Rotten to the Core (Mokhiber and Weissman)
13. Caroline Mayer & Amy Joyce: Blowing the Whistle (Washington Post)


1. From The Nation
April 8, 2002
Shocked, Shocked! Enronian Myths Exposed
by Thomas Frank

In happier times the Enron corporation used to run a TV commercial in which
a clever young executive punctured the pretensions of a panel of windbag
politicians with a single sharp word: "Why?" It was supposed to be a
thirty-second demonstration of the populist wisdom of electricity
deregulation: Anyone could see that our legislators were arrogant fogies who
kept us from having economic "choices" simply because they thought they knew
better than the people.

These days, the clever young executives of Enron are taking the Fifth, not
cracking wise at the Man. And the notion of Enron acting in the public
interest--of Enron acting in anyone's interest other than that of those same
clever young executives--can only register as a sort of sick joke. Consider
just the stories that have made the front pages over the past few months.
Thanks to the failure of a series of shady accounting tricks, Enron had to
amend its profits for the past few years by hundreds of millions of dollars.
Naturally, this destroyed investors' faith in Enron management, causing a
catastrophic drop in the company's share price and a downgrading of its debt
rating, leading immediately to bankruptcy. Enron employees, who had been
encouraged to buy shares right up to the end, found they were not allowed to
sell and watched helplessly as their 401(k)s were wiped out. While
encouraging their workers to stand pat, top Enron managers were unloading
the soon-to-be-worthless stuff as fast as they could.

Then it was the turn of Arthur Andersen, the accounting firm that had OK'd
the fatal transactions, and whose managers were discovered feverishly
shredding Enron-related documents. Before long Andersen found itself
indicted and hemorrhaging clients. The chain reaction soon spread over the
rest of the corporate landscape, where Enron had long been regarded as a
leader in the field of clever accounting tricks. Copycat bankruptcies broke
out. Markets drooped sorrowfully.

This would be enough to seal the eternal disgrace of most companies. But the
Enron story only got worse. We are accustomed to associating corporate
interests with conservatism, but Enron seems to have had its own ideology, a
swaggering free-market evangelism that it promoted not so much by argument
as by financial might. Enron not only bankrolled pundits and endowed
university chairs in economics and political science, but it ingratiated
itself with those very politicians it gloried in mocking in its ads. Forever
pushing for the deregulation of the various fields in which it operated, the
company gave campaign contributions to nearly half the members of Congress.
Its influence in state legislatures was sufficiently great that journalists
now speak of Enron as the main force behind the movement for electricity
deregulation that swept the nation in the late 1990s. National politicians
received seats on the Enron board after doing their good deeds for the
company, while others were rotated from Enron into the upper echelons of the
Administration. And, as everyone now knows, George W. Bush was Enron's
special pet, nurtured on Enron money, Enron jets and Enron connections. He
had been in office for only a few weeks before the favors that Enron paid
for began to flow: friendly appointments, special consideration in energy

Right up to the end, Enron was described in the exalted realms of management
theory and business journalism with virtually unmodulated adoration. Fortune
compared Enron to Elvis. Superguru Gary Hamel, who devoted a section of
Leading the Revolution to the company, waxed enthusiastic about Enron's
"genius for innovation" and its "capacity for revolution."

The effect of this has been to promote what could have been a simple tale of
corporate crime into the staggering revelation that everyone you listened to
in the New Economy years was either a liar or an ignoramus. Despite all the
recent lamentations about public "cynicism," Americans seem generally to
have believed that they lived in a world where the depictions of the
business press were fairly accurate, where pundits argued for things because
they believed in them, where accountants and stock analysts spoke
truthfully, where politicians represented their constituents and not just
those with money, where the stock market had been cleansed of crooks and was
now safe enough for little old ladies from Beardstown. The Enron story has
flattened each of these faiths simultaneously. It's a perfect ideological
reversal, a narrative that was supposed to prove the goodness of the New
Economic Order and that has instead discredited it in every respect.

Thanks to the vast chasm between the populist promise of the New Economy and
what it has actually delivered, a corporation is today the target of a
species of outrage usually reserved for enemy dictators or mass murderers.
The other day an artist friend--a man who has never talked about big
business issues with me before--volunteered without any prompting his
ferocious feelings toward Enron CEO Ken Lay. All the way from the South Side
of Chicago to O'Hare a Nigerian taxi driver shared with me his anger and
disbelief at the reach of Enron's malign influence. According to a poll
taken in February by the Pew Center for the People and the Press, more
people were following the Enron scandal than the Olympics.

The epicenter of this earthquake is the Enron headquarters in Houston,
familiar by now to television viewers around the world with its crooked-E
logo out front. I read in a management book about the building's
state-of-the-art trading floor where the Enron hotshots conducted the energy
business of the nation, and in the National Enquirer about the plush
upper-story "bachelor pads" where the Enron brass conducted their trysts
with secretaries, but what I saw was a bland fifty-story glass tower, built
in the smooth and ornament-free corporate style of the 1980s, and connected
by many enclosed walkways to similar-looking office buildings in the
neighborhood. From one of these climate-controlled tubes I could look down
on the Antioch Baptist Church, one of the oldest African-American
institutions in the city, its lot now little more than an island between the
busy downtown streets, and its gothic tower with its somehow defiant sign,
Jesus Saves, dwarfed by the encircling skyscrapers.

The ATMs here were still displaying jaunty Enron propaganda and a stock
ticker was still telling passers-by where Enron stood in the market's
all-knowing estimation (at a humble 29 cents on the day I visited), while an
incongruous slogan touting Enron's "endless possibilities" zipped by
underneath. In the tower next door, where laid-off Enron employees used
computers to look for new jobs, the walls were still covered with framed
motivational posters illustrating the company's four "values": "Respect,"
"Integrity," "Communication," "Excellence." Few of the ironies are lost on
the skyscraper's inhabitants, one imagines. In fact, in the lobby someone
had actually assembled a collection of embarrassing Enroniana, placed each
slogan-bearing coffee cup or boasting paperweight under a museum-quality
vitrine, and given the resulting works of "art" some sarcastic title: "A Lot
of Bull." "Not a Shred of Evidence."

Bitterness of this sort isn't hard to come by in Houston. Mentioning Enron
to the proprietors of a shop in the tony River Oaks neighborhood earned me
an earful of righteous disgust toward Mrs. Ken Lay, who had tearfully
announced on TV a few nights before that the company's demise might force
her to sell off two of her many homes. Rachel Hernandez, who worked in
Enron's relocation department until that operation was outsourced some years
ago, told me she thought her former bosses deserved jail time for what they
had done. And a former systems administrator for Enron Broadband named Barry
La Valla recalled how Enron persuaded him to give up a house in Portland and
take a significant pay cut to move to Houston, just six months before the
company declared bankruptcy. Everywhere I heard angry stories of ruined
401(k)s, of personal losses in the range of $60,000, $100,000, a million.

But what surprised me was the number of former Enronites I came across who
had more ambivalent feelings about the disgraced corporation, who were
willing to accept the damage the company has inflicted on the nation and on
their savings, and to defend what Enron did, or at least what Enron set out
to do. This is partly because the company chose its employees well: They
are, after all, traders and MBAs, true believers in free-market theory even
though they themselves have now become international symbols of its
resounding failure. For several of the people I talked to, Enron had been
their first job out of college or even out of high school, and they knew no
other world than the New Economy 1990s, with its saintly CEOs and its many
shrines to Our Lady of Perpetual Privatization. How are you supposed to
criticize the laissez-faire order when you've never heard a competing theory
in your life?

Such weird ambivalence was also clearly a response to the fact that the
international press corps has descended on Houston as though a whole flock
of toddlers had been caught in wells, and has proceeded to make an instant
mini-celebrity of every laid-off Enron employee who wants to play ball.
Nearly everyone I met had been on TV, or had their picture in the paper, or
told me about some other media moment. And with the entire world screaming
for Ken Lay's head, many of the ex-Enronians have decided to cast themselves
as voices of moderation. After all, they worked there, too: They contributed
money to the infamous PAC, they cheered when electricity deregulation swept
the nation, and when I talked to them they still referred almost universally
to former CEO Jeffrey Skilling as "Jeff."

"It's a spectacle," says Bilal Bajwa, who came from Pakistan to work for
Enron and whom I found searching for a new job from a computer in a downtown
office building. "I might feel bitter a year down the road," but for now
such emotions are lost in the glare. Instead of the usual
disgruntled-former-employee mentality, what he notices among his
ex-colleagues is a variation on the Stockholm syndrome, in which "the only
one who defends the kidnapper is the kidnapped."

This curious contradiction came up again when I talked to John Allario, a
smart and articulate energy business development professional who clearly
understands the complex business dealings that brought Enron down. As such,
he is in high demand among radio, TV and print reporters from around the
world, fielding phone calls, in just the few hours that I spent with him,
from ABC News and TV crews from France and Japan. He spends his time these
days running an ex-Enron website called Laydoff.com, which burns with the
outrage of the wrongfully terminated, magnified by the spectacular
self-aggrandizement of Enron upper management. Allario's Enron career ended
when he was simply told to clear out one day on his cell phone. And now, as
he puts it on the website, "your 401k is depleted, your after-tax severance
packages are reduced to one month's mortgage payment, and those who sent you
packing are buying Hill Country or ski slope vacation properties with their
exorbitant retention bonuses." He reads aloud from a typical e-mail to the
Laydoff.com chat room: "I cannot express how incensed I am by the plight of
you all." Allario also sells a line of T-shirts printed with anti-Enron
jokes. (I bought one that reads: "Loss of job--$100,000. Watching 401K
disappear--$225,000. Losses on company stock options--$505,000. Ten years
hard time for guilty executives--Priceless.") He shows me a lucite computer
mouse, a bit of Enroniana issued in 2000 to commemorate the first year of
EnronOnline and marked with the staggering sum ("gross notional value") of
$274,602,202,016. It's a perfect example of what was wrong with the company.
"It is total obfuscation!" Allario says. "These figures are more than the
GNP of Poland. Even if you knew what gross notional value meant, the
calculations of these numbers were internal secrets, which were not open to
verification by employees."

On the other hand, Allario is moved not to anger but to a sort of empathy at
the sight of Jeff Skilling testifying before the House Energy and Commerce
subcommittee on CNN. "I still respect some of those guys for their mental
acuity," he says. They have "a creative, special brainpower." What's more,
Congress will find it difficult to prove actual fraud, he suspects. "Enron
knew the laws as well, and sometimes better, than our own accountants," he
tells me. "The job of Enron's finance and accounting groups was to find a
way to structure around unfavorable accounting rules. It was a game to

Allario's TV goes on the blink and we head over to a local brew pub to watch
Skilling's testimony on their set. Nobody in the place objects when we ask
them to turn off the classic rock and crank the volume on CNBC. The details
of the deals Skilling is being asked to explain are almost nightmarishly
complicated. Allario, though, is riveted to the screen. "This is such
compelling TV," he says. "As good as the World Series." Back in Washington,
the notoriously quick-tempered Skilling is doing his best to impersonate a
sensitive, concerned person. He gets out of one question by relating how the
power went out during a crucial meeting. In the corner of the screen, both
the Dow and the Nasdaq go from green to red.

"One of the legacies of the Enron debacle," Allario tells me later, "will be
how so many smart MBAs drank the Enron Kool-Aid. Listening to Jeff, I'm
falling for it again. I want to take another sip." He thinks for a while
about the better times at Enron, about the Promethean free-market ambitions
of all those young executives. "We set ourselves apart," he says. "We were
for free thinking. For doing something good." Enron lived to open new
markets in previously unimagined areas. "We could commoditize anything,"
Allario continues. "Water, paper, air freight capacity, weather, computer
chips, ad space on TV."

Again and again during my stay in Houston I am told--by TV commentators, by
business magazines, by former Enronians in whatever state of outrage--that
what did the company in was greed. That Enron's true mission was a glorious
one, that deregulation is a noble goal, but that greed in the upper echelons
got in the way. Obviously, there is considerable truth to this. After all,
Andrew Fastow, Michael Kopper and the rest of the clever Enron financiers
received many millions of dollars as compensation for running the
partnerships that inflated Enron's numbers and ultimately destroyed the
company. And other top Enron executives were promised royal bonuses when the
company's shares hit a certain price target--a clear incentive to do
whatever was necessary to make Enron look attractive to Wall Street.

In previous years, though, greed was regarded as the fuel that drove Enron's
spectacular intervention in so many different markets. Way back in 2000,
Gary Hamel identified the opportunity that Enron executives had to indulge
in what he quaintly called "personal wealth accumulation" as a critical
element of the company's success. And for Hamel--for nearly everyone in the
New Economy amen corner--that was perfectly OK, if not downright virtuous.
The great myth of the 1990s was the fundamental decency of capitalist
motivations. Free markets were democracy at its finest. CEOs were men of the
people, lovable friends of rich and poor alike. The disappearance of job
security and labor unions was "free agency." Even the endless cycles of
obsolescence and destruction and ruin were something creative, something
cool. Only when such destruction threatens to derail the stock market and
discredit the entire New Economy does the moral turpitude of top management
become an issue. Only then do the Aquinases of business journalism discover
the fine distinctions between sensitivity to incentives and base greed.

However spectacular its effects, the wreck of Enron is a far more ordinary
matter than such moralizing makes it appear. This is not the result of sin;
this is the way markets work. It is simply what happens when regulatory
oversight is systematically shut down, bought off and defunded; when
business journalism becomes salesmanship; when investment banking becomes
salesmanship; and when political power is a prize that goes to the highest
bidder. There can be little doubt that the kind of microscopic scrutiny that
Enron is now undergoing would uncover similar accounting and compensation
scandals at many other companies in America. And it is well-known that
industry lobbyists routinely craft the legislation that is supposed to
regulate their industries. Credit-card lobbyists write the bankruptcy laws;
broadcasting lobbyists write the telecommunications laws. It's not because
they're greedy, it's because they can.

These are mistakes that the country seems determined to repeat every few
decades or so. In the early 1930s the Senate Banking Committee performed a
long investigation of Wall Street's practices during the just-ended bull
market, and many of the shenanigans they unearthed seem straight out of the
Enron playbook: lucrative options deals for insiders, dummy corporations set
up to disguise liabilities, friendly politicians, financial institutions
using their own endlessly rising stock to secure questionable deals and, of
course, the rampant transformation of investment bankers into salesmen. (One
critical difference: That time, the mighty men of Wall Street, concerned
about their industry's reputation, actually testified.)

Years after those revelations, Ferdinand Pecora, the committee's counsel,
wrote about the small investor who was surprised to find all of this going
on, who had somehow believed that everything on Wall Street was regulated,
overseen, safe: "He has reckoned without the ingenuity of the legal
technicians and the complaisance of governmental authorities toward powerful
financial and business groups during the lamented pre-New Deal era." Nor was
this malign ingenuity--what the Enron brass called "creativity"--finally
extirpated by the 1930s reforms. "Under the surface of the governmental
regulation of the securities market," Pecora warned, "the same forces that
produced the riotous speculative excesses of the 'wild bull market' of 1929
still give evidences of their existence and influence." Such corruption
wasn't merely the product of individual greed; it was a force of free-market
nature, and it would reassert itself by default if we didn't remain

And, of course, we didn't. (And we won't, either, if Dubya has his way.)
Amid a frenzy of New Economy exuberance we came to believe that the rules
had been somehow suspended. That only if we left markets free to do their
special thing would we ever achieve real economic democracy. In life Enron
was hailed as the great exemplar of this bankrupt idea; so it should be in
death as well.


2. http://news.com.com/2100-1033-865450.html

Global Crossing defends its accounting
By Reuters
March 21, 2002, 12:05 PM PT

update WASHINGTON--As lawmakers delve into corporate collapses beyond Enron,
bankrupt telecommunications provider Global Crossing and other industry
players on Thursday defended their swaps of network capacity, a practice now
being probed by federal authorities.
Executives of Global Crossing, Qwest Communications International, WorldCom
and Cable & Wireless told lawmakers that while they engaged in the swaps of
network capacity to fill in gaps in service, the contemporaneous sales were
limited and represented a small part of their revenue.

The executives, appearing before the first congressional hearings into
Global Crossing's downfall, also testified that the swaps were accounted for
properly and were disclosed.

A whistle-blower at Global Crossing has accused the company of inflating its
earnings by improperly accounting for the transactions, giving investors an
inaccurate picture of its state. The company has denied the allegations.

"The collapse of Global Crossing calls into question how much confidence
employees, investors and the public should have in financial information
that is released by companies," said Rep. Sue Kelly, chairwoman of the panel
conducting the hearing, the U.S. House Financial subcommittee on
investigations and oversight.

"It appears that swaps are being used as a quick and easy way to inflate
earnings and make a company look more profitable than it really is," the New
York Republican said, adding that swaps were not required to be reported in
certain earnings statements.

Under a mountain of debt, Global Crossing in January filed for the
fourth-largest U.S. bankruptcy because of slim demand for voice and data
transmissions on its network linking 200 cities in 27 countries.

Questions about the transactions have triggered probes by the Securities and
Exchange Commission and the FBI. In addition, the SEC has requested
information from Qwest and WorldCom on the transactions.

"These transactions were entirely lawful, were reported in a manner in
accordance with applicable accounting principles, and were fully disclosed,"
Chief Executive John Legere and Chief Financial Officer Dan Cohrs said in
testimony to the panel. They denied the transactions led to the company's

Roy Olofson, who was an executive at Global Crossing, claims he was fired
after blowing the whistle on the company's accounting practices, has sued
the once high-flying fiber-optics network operator, and is cooperating with

The company reviewed allegations by a former employee that it improperly
accounted for the sales on its books, but no wrongdoing was found, Legere
and Cohrs said.

However, an independent counsel has been hired to review the books. The
company also disclosed that the SEC is reviewing stock sales by its current
and former executives. Its chairman, Gary Winnick, sold more than $700
million worth of shares in two years.

Congress is already investigating the collapse of energy trading giant
Enron, which set off a wave of questions and investor worries about the
soundness of corporate America's bookkeeping.

The House Financial Services Committee is drafting legislation to establish
a new accounting watchdog body and to require companies to provide more
public information about their financial health in real time.

"There's certainly very serious questions as to whether it engaged in
practices that had far more to do with meeting analysts' estimates than with
economic substance," said Rep. John LaFalce, the ranking Democrat on the
full financial services committee.

Global Crossing had the same auditor as Enron, Andersen, and the
telecommunications company said its transactions were done in consultation
with the auditor and conformed to generally accepted accounting practices.

The carriers also told lawmakers that their sales of network capacity, known
as "indefeasible rights of use" (IRUs), were a small part of their
businesses, and the swaps between carriers were even smaller.

"At their peak, in the year ending March 31, 2001, such sales accounted for
less than 5 percent of Cable & Wireless' revenues, and have since declined
as carriers largely completed their network build-out programs," said Andrew
McGrath, president of the service providers channel at the company.

"Revenue attributable to IRU sales that occurred at the same time as
purchase of an IRU in 2000 and 2001 were approximately 2 percent and 3.5
percent of total reported revenues, respectively," Qwest President Mohebbi
told the panel.

Global Crossing said it engaged in less than 24 contemporaneous transactions
in 2000 and 2001, and all the capacity transactions represented a small part
of its revenue.

In addition, the executives said the company revealed information in its
press releases and periodic regulatory filings about the transactions in
which capacity was cataloged as a capital expense on the buyer's books and
as a part of cash flow in the seller's books.

Qwest said the swaps were accounted for in a strict manner.

"Where the purchase of sale transactions occurred at the same time, Qwest
applied the more restrictive rules for revenue recognition on what the
accountants call 'non-monetary transactions,'" Mohebbi told the panel.


3. http://biz.yahoo.com/rb/020227/business_enron_congress_dc_2.html

Wednesday February 27, 5:31 pm Eastern Time
Congress Asks Analysts About Enron
By Kevin Drawbaugh

WASHINGTON (Reuters) - Wall Street analysts complained to Congress on
Wednesday that Enron Corp. fooled them into believing it was a good
investment, while critics said they should have dug deeper to find the
truth. Some of America's savviest number-crunchers told a Senate panel they
clung firmly to ``buy'' ratings on Enron's stock even as it lurched toward
bankruptcy because they trusted financial statements they later found were
misleading and incomplete.

``Enron's financial statements ... did not represent the company's true
financial condition,'' said Raymond Niles, senior analyst at Citigroup Inc.
unit Salomon Smith Barney.

Niles kept a ``strong buy'' rating on Enron until Oct. 25, even after its
share price had fallen to $16 from $76 a year earlier. He backed off to a
hold rating just days after the energy trading firm disclosed its accounting
was under federal investigation.

Similarly, Curt Launer, managing director of equity research at Credit
Suisse First Boston maintained a ''strong buy'' on Enron until the last week
in November, days before it filed the largest-ever U.S. bankruptcy on Dec.

``It now appears that some critical information on which I relied for my
analysis of Enron was inaccurate or incomplete,'' Launer told the Senate
Governmental Affairs Committee.

But an independent market researcher told the panel that the risks
underlying Houston-based Enron's complex balance sheet were plain to see for
anyone who cared to look closely.

``For any analyst to say there were no warnings in the public filings, well,
they couldn't have been reading the same filings I read,'' said Howard
Schilit, president of the Center for Financial Research and Analysis of
Rockville, Maryland.

As Congress continued to sift the wreckage of Enron for answers, committee
Chairman Sen. Joseph Lieberman said U.S. investors were in a crisis of
confidence and were questioning the value of sell-side equity analysis.

``Without sound information, or even worse, with misleading information,
(investors) may as well go gambling,'' he said.


Sell-side stock analysts climbed to market stardom in the bullish 1990s,
when it was easy to issue ``buy'' recommendations. But they have stumbled in
recent years as the market has retreated and they have failed to pull in
their horns.

Less than 2 percent of all analyst recommendations were ''sells'' or
``strong sells'' during the go-go years and, with only a slight shift since,
that is still true today, said Charles Hill, director of research at the
independent market research firm Thomson Financial/First Call.

Hill and others told senators such an imbalance would continue until
deep-seated conflicts of interest are resolved within an industry that
underwrites, owns, sells and promotes stocks.

``Until the so-called Chinese wall between research and investment banking
is restored at the brokerage houses, there will continue to be a problem,''
Hill told the committee.

Thomson data showed nine of 15 analysts covering Enron kept ''buy'' or
``strong buy'' ratings until mid-November, despite a series of disturbing
events, including the announcement of a Securities and Exchange Commission
probe, a massive earnings restatement, the chief financial officer's
dismissal and the sudden resignation of former President Jeffrey Skilling.

Once the seventh-largest U.S. company, Enron's collapse wiped out thousand
of jobs and billions of dollars in shareholder equity. In addition to the
SEC, the Justice Department and 10 congressional committees are


Critics told senators that analysts, despite increased scrutiny of their
objectivity, are still under pressure to make positive statements about
companies that often have advisory, underwriting or trading ties to the
analysts' banks.

``Wall Street research is pervaded by conflicts of interest that can, and
have, corrupted the objectivity of research,'' testified Frank Torres,
legislative counsel at Consumers Union, publisher of Consumer Reports

``Conflicts of interest will exist as long as investment banking, trading
and research are permitted to be bundled together in one firm,'' said

All four of the analysts testifying, including those from JP Morgan Chase
and Lehman Brothers, said their firms were involved with various deals
involving Enron in recent months. All said that they had also been privy to
inside knowledge of those deals before they became public.

Earlier this month some lawmakers, the SEC and the market-regulating
National Association of Securities Dealers proposed new rules to increase
the independence of analysts, including a prohibition on linking pay to
specific investment banking deals like stock offerings.

The proposals would prohibit analysts from being supervised by their firm's
investment banking department and force them to disclose in research reports
if they own, or if anyone in their family owns, shares of the stock they are

Lieberman, a Connecticut Democrat, said he applauded these proposals but
added, ``I believe more must ultimately be done.''


4. From The New York Times:
The Man Who Paid the Price for Sizing Up Enron
March 27, 2002

WASHINGTON, March 26 - Enron executives pressed UBS PaineWebber
to take action against a broker who advised some Enron employees to sell
their shares in August and was fired by the brokerage firm within hours of
the complaint, according to e-mail messages released today by Congressional

The broker, Chung Wu, of PaineWebber's Houston office, sent a message to
clients early on Aug. 21 warning that Enron's "financial situation is
deteriorating" and that they should "take some money off the table."

That afternoon, an Enron executive in charge of its stock option program
sent a stern message to PaineWebber executives, including the Houston branch
office manager. "Please handle this situation," the newly released message
stated. "This is extremely disturbing to me."

PaineWebber fired Mr. Wu less than three hours later.

That evening, the firm retracted Mr. Wu's assessment of Enron's stock - then
about $36 - by sending his clients an optimistic report that Enron was
"likely heading higher than lower from here on out." A few months later, the
stock was worthless, and the company was in bankruptcy court.

The episode illustrates just how easily Enron appears to have thrown its
weight around at a Wall Street firm, which may have satisfied a big
corporate customer at the expense of some retail customers. PaineWebber
managed Enron's stock option program for employees and handled brokerage
accounts for many company executives. It also did substantial investment
banking work for Enron, which generated fees for the firm. PaineWebber said
that Mr. Wu was fired because he had violated policies by sending
unauthorized e-mail messages to more than 10 clients and by failing to
disclose that PaineWebber's research analyst had rated Enron a "strong buy."

But the day that Mr. Wu was fired was the day that Enron's chairman, Kenneth
L. Lay, was both shedding some of his own shares and talking up the stock.
On Aug. 21, Mr. Lay sold $4 million of stock to the company. He also sent an
e-mail message to employees saying that one of his highest priorities was to
restore investor confidence, adding that that "should result in a
significantly higher stock price."

The message complaining to PaineWebber about Mr. Wu was sent by Aaron Brown,
an Enron official who PaineWebber said helped oversee the stock option
program. Mr. Brown could not be reached for comment. A switchboard operator
at Enron said today that Mr. Brown no longer worked at the company, and a
spokesman did not respond to questions.

Mr. Wu, who declined to comment through his lawyer today, previously
asserted that Enron was behind his dismissal, but today's disclosure was the
first to show pressure was applied by Enron officials. Mr. Wu now works for
A. G. Edwards.

A PaineWebber spokesman declined to elaborate on the matter involving Mr. Wu
but pointed to a letter sent to Congress last week.

In that letter, PaineWebber said that Mr. Wu violated a rule of the National
Association of Securities Dealers requiring that sales literature be
reviewed by a supervisor before being sent to clients. The firm also said
that Mr. Wu's advice was hastily drafted and "raises basic suitability
concerns" and pointed to his suggestion that investors who hold the stock or
vested options might want to use options to hedge their exposure.

The firm said that Mr. Wu had acknowledged that he violated its policy and
recognized the seriousness of the situation.

The PaineWebber letter stated: "Any financial adviser who sends an e-mail in
the middle of the night to dozens of firm clients urging them to take an
action contrary to Warburg's research recommendation, without informing the
clients of that recommendation or obtaining the necessary review and
approval, would be treated the same as Mr. Wu." (UBS Warburg is an
affiliated firm.)

A securities lawyer suggested that PaineWebber may have overreacted. "While
certainly brokerage firms should have some reasonable controls over the flow
of information, this appears to be a totally egregious example," said Lewis
Lowenfels, of Tolins & Lowenfels in New York and the co-author of a treatise
on securities laws.

The e-mail messages from Enron were released today by Representative Henry
A. Waxman of California, the ranking Democrat on the House Government Reform
Committee. Mr. Waxman has accused PaineWebber of breaching its fiduciary
duties in the episode and has said that Mr. Wu previously sent group
messages to clients without being punished.

Mr. Waxman said today that "Enron's conduct regarding PaineWebber appears to
be the latest in a series of indefensible actions."

"It appears that Enron's management pressured PaineWebber to dismiss Chung
Wu, a PaineWebber financial adviser who was supposed to be independent of
Enron, simply because Mr. Wu suggested to clients that they sell their Enron

A lawsuit against PaineWebber filed by Enron investors, including some
clients of Mr. Wu, argues that PaineWebber "directly lied to its clients for
its own pecuniary gain by failing to reveal adverse information which it
knew about Enron."

It asserts that other PaineWebber brokers in the Houston office "were
selling as much Enron stock as they possibly could for highly placed Enron
clients, despite the fact that inside PaineWebber, brokers commonly joked
about Enron's stability."

The lawsuit also suggests another reason PaineWebber wanted to keep Enron
happy. The brokerage firm had "an exclusive arrangement with Enron that
PaineWebber would be the first brokerage company any Enron employee would
deal with concerning the Enron employees' stock options and deferred benefit

The suit also says that "getting first crack at these Enron employees paid
off because about one out of three employees decided to keep their
portfolios at PaineWebber."

That meant hundreds of millions of dollars in added revenue each year, the
suit says.

A PaineWebber spokesman called the lawsuit "totally without merit."

In an e-mail message shortly after Mr. Wu's firing, PaineWebber's Houston
branch office manager, Patrick Mendenhall, apologized profusely to Enron.

"I should have known that if I was this frustrated, that you, as our client,
were more so," Mr. Mendenhall wrote to Mary Joyce, an Enron official who
helped run the stock option program. "The financial adviser has been
terminated," Mr. Mendenhall added. The PaineWebber spokesman declined to
comment about the e-mail.

That evening, Mr. Mendenhall sent a message to Mr. Wu's clients. "To the
fullest extent possible, on behalf of UBS PaineWebber, I hereby retract Mr.
Wu's statements," he wrote. He said that Mr. Wu had violated firm policy and
attached a copy of the firm's latest report from Ron Barone, who had a
"strong buy."

"We would be aggressive buyers of Enron at current levels," Mr. Barone's
research report stated.


Personal Responsibility for the Corporate Elite
By Russell Mokhiber and Robert Weissman

Before the corporate and political elite consign the "corporate
accountability" proposal issued by President Bush last week to the
dustbin, it is worth highlighting one element: the idea that CEOs sign
and personally attest to the accuracy of the financial numbers their
companies make public.

Here is what is important about this proposal: No one believes the CEOs
are going to actually generate the numbers and track down each and every
figure. Rather, the expectation is that making the CEOs personally
responsible for the truthfulness of their statements will give them the
needed incentive to put in place systems to ensure accuracy.

This is a radical concept.

Don't worry. We haven't lost perspective. We have zero expectation that
the Bush administration is interested in applying the concept seriously.

Our point here is to emphasize the power of the concept.

One of the reasons corporations are so powerful is that they are
entities structured in complex fashion to shield themselves and their
top executives from responsibility for damage they may inflict on
others. One of the perquisites of large size is that -- absent an
Enron-scale debacle -- top management can always claim that "they didn't
know" about the misdeeds committed by the corporation, presumably
ordered or overseen by a lower-level official.

The Bush proposal, taken seriously, cuts through the protective layering
insulating top executives.

It puts the onus on the CEO, making it the CEO's job to know. Under the
Bush proposal, if a CEO attests to the validity of a grossly inaccurate
financial statement, he or she would be required to return bonuses, and
could be barred from serving as an officer or director of any publicly
traded company.

There's no reason this assignment of personal responsibility to CEOs
should be limited to financial disclosures.

CEOs should be made personally responsible for ensuring their
corporation complies with its specific legal duties, and particularly
their obligation to comply with the law.

Leave aside, for now, the issue of corporate executives' obligations to
shareholders. Under the "business judgment" rule, executives are largely
immune from liability to shareholders for any action undertaken in good
faith. Underlying the business judgment rule is the notion that
executives need discretion to use their best judgment to make corporate
decisions, and that courts should not second-guess those decisions in
hindsight. There are problems with the business judgment rule, but it is
clear that executives do need some discretion when it comes to running a

But that discretion cannot include contravening statutory law and
related regulations. Those rules circumscribe permissible corporate
behavior. Corporations have a legal duty to respect occupational health
and safety rules, environmental laws, workers' labor rights, consumer
regulations and criminal codes.

And just the way President Bush was right to propose tbat CEOs take
personal responsibility for ensuring their corporations fulfill their
legal duty to issue accurate financial statements, it makes sense to
demand that corporations' top officials -- their chief executive
officers -- take personal responsibility for ensuring the companies
comply with legal duties related to worker safety, worker rights, the
environment, consumer protection and avoiding criminal wrongdoing.

The logic here is the same as in the Bush proposal. CEOs of large
corporations cannot be expected to know the details of every action
undertaken in the corporate name. But by being held personally
responsible -- with meaningful penalties in case of company
noncompliance -- they can be given the necessary incentive to put in
place systems to ensure their company respects the law.

"America is ushering in a responsibility era," President Bush said in
issuing his corporate accountability proposal, "a culture regaining a
sense of personal responsibility, where each of us understands we're
responsible for the decisions we make in life. And this new culture must
include a renewed sense of corporate responsibility. If you lead a
corporation, you have a responsibility to serve your shareholders, to be
honest with your employees. You have a responsibility to obey the law
and to tell the truth."

Those are fine principles. Let's give them teeth by holding CEOs
personally responsible not just for their corporation's financial
statements, but for making sure their corporations comply with the law.

Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime
Reporter. Robert Weissman is editor of the Washington, D.C.-based
Multinational Monitor, http://www.essential.org/monitor. They are
co-authors of Corporate Predators: The Hunt for MegaProfits and the
Attack on  Democracy (Monroe, Maine: Common Courage Press, 1999;

(c) Russell Mokhiber and Robert Weissman

This article is posted at:


6. Andersen Called to Account

Arthur Andersen wouldn't agree to plead guilty to anything, so yesterday the
Justice Department unsealed an obstruction-of-justice indictment against
Enron's disgraced auditor. No one ran Andersen stories in the obituary
section, but the general tone was that Andersen's future looks ugly.

The New York Times emphasized the historical angle, noting in its first
sentence that this is "the first criminal charge ever brought against a
major accounting firm," and went on to describe the "particularly
contentious" dealings between Justice and Andersen in the hours before the
indictment. Many outlets ran multiple articles on the indictment and its
ramifications, which made for a certain sameness of coverage: Unspun saw a
prosecutor accusing Andersen of "wholesale destruction of tons of paperwork"
in six different places.

Andersen indicated it would fight. The company's sound-bite, repeated
everywhere, was that Justice was trying to impose a "death penalty" on the
firm. Claiming that the shredding shenanigans were isolated, not systemic,
the company seemed to indicate that it will be employing a
one-bad-apple-don't-spoil-the-whole-bunch defense, although we're
disappointed that no publications chose to quote the Osmond Brothers on the

Andersen's problems don't end with this indictment, of course. Some
high-profile clients such as Oracle's Larry Ellison are standing by their
accountant, but many outlets reported that some of the company's marquee
clients have defected, making it harder for Andersen to sell itself to
another Big Five firm. Also, at least four state accounting boards have
started Andersen investigations, with 46 more of them likely to pile on
soon. With so much at stake and both sides expressing their positions in
extremes, this case may make the Tanya Harding-Paula Jones bout look
dignified. - Jimmy Guterman

Andersen Charged With Obstruction in Enron Inquiry

Indictment by Justice Department
Puts Arthur Andersen's Fate on Line

Andersen Indictment in Shredding Case
Puts Its Future in Doubt as Clients Bolt

Andersen Indicted on Obstruction of Justice Charge

Andersen: One Player in Big Drama

Many Firms To Stick With Andersen

Americans Outraged That Corporations Cheat Just Like They Do


7. The Creative Destruction of Enron


By Moisés Naím

Originally published in the Financial Times, March 3, 2002.

What country, other than the US, allows an Enron-class company to go under?
An Enron-class company is a dominant and innovative global player in a
highly sensitive market and is funded by influential blue-chip banks and by
thousands of small investors. More importantly, an Enron-class company is a
political powerhouse whose influence runs deep and wide, with close allies
in the executive, legislative and judiciary branches of government and a
network of well fed supporters in the ranks of academia, journalism,
interest groups, sports clubs and myriad charities.

Every country has Enron-class companies. But only a few countries seem to
have what it takes to allow such a company to go out of business without
politicians trying to bail it out.

Japan is not one of these, of course. A few days after Enron collapsed,
Junichiro Koizumi, the most reform-minded Japanese prime minister in
decades, explained that the bail-out of Daiei, a large supermarket chain,
was necessary because "the collapse of Daiei will have a very big impact".

Such reasoning has allowed a new category of companies to emerge in the last
decade in Japan - "zombie companies", kept alive through the largesse of
Japanese banks acting in cahoots with the government and at the behest of

Japan is not alone. In most countries the government is too weak or too
corrupt to pull the plug on big, politically influential companies. Most of
South Korea's large conglomerates, the chaebol, survived that country's
financial crisis without crashing. The International Monetary Fund's
attempts to link its aid to improved corporate governance was undermined by
an economic recovery that came very quickly and gave the patient the
strength to ignore much of the Fund's recommended treatment.

In many emerging markets, off-balance sheet transactions, quasi-fraudulent
deals that benefit controlling investors and top management and other forms
of Enron-like corporate plunder are common. Moreover, the government not
only tolerates the plunder but is often seduced into contributing taxpayers'
money to the booty once there is nothing left to steal and the company is
verging on bankruptcy.

In continental Europe, Mario Monti, the tough commissioner for competition
policy - who is also entrusted with supervising state aid - does not believe
that troubled companies should be automatically rescued. But like Mr
Koizumi, he is flexible. "There can be situations where the destructiveness
of liquidation, and the prospects of future viability outweigh the temporary
distortions caused by rescuing companies in difficulty with public money,"
he says.

Gerhard Schroeder, the German chancellor, agrees. In late 1999, for example,
he championed a DM3bn

($1.4bn) rescue package of Philip Holzmann, a giant construction company. In
the current manoeuvring to salvage Kirch Gruppe, Germany's debt-laden media
group, the role of politicians seems to be as crucial as that of bankers or

Political attitudes and governmental practices in cases of corporate rescue
are fickle. Just a few months after Holzmann's bailout, several European
airlines were allowed to go under. At the same time, the Bush administration
launched a massive bailout of US airlines, which had been hurting long
before September 11 and continue to be in bad shape even after $15bn of
taxpayers' money.

Mr Bush's critics note that allowing Enron to go under was a decision based
not on economic discipline but sheer political survival. Enron overdosed on
political influence and became untouchable by politicians when it most
needed them. Bailing out Enron was not an option for the Bush administration
precisely because so many of its most prominent members had taken money from
it. The critics also argue that the administration did not bail out Enron
because there was nothing to bail out. The company had become an empty shell
with no possibility of survival. True on both counts.

But it is equally true that in most countries these two arguments have often
failed to stop the government from rescuing well-connected companies. In the
banking crises common in the last two decades, large banks were bailed out
by politicians and government officials who figured prominently in these
banks' lists of debtors. Replenishing the empty coffers of failed companies
with public funds is also a common practice. Remember Credit Lyonnais?

>From this more comparative perspective, Enron's debacle acquires a different
hue. It is, undoubtedly, a tragedy. Workers who lost their pensions while
the company's top management cashed out may have no patience for the
argument that letting Enron go under is a strength and not a weakness of the
American system. Others will argue that the correct focus is not the
propensity of most governments in the world to bail out big, political
companies but the systemic failures and the corruption that allowed Enron to
happen. As Arthur Levitt, the former chairman of the Securities and Exchange
Commission, told the US Congress, among US corporations "financial
statements often are not an accurate reflection of corporate performance but
a Potemkin village of deceit . . ."

But it is important not to lose sight of the likely positive consequences of
Enron's demise. As a result of Enron's crash and the ensuing outrage, the US
corporate system will emerge stronger and more effective than it was.
Auditors will probably be regulated and their conflict of interests when
also acting as consultants will be curbed. Accounting standards will be
strengthened and made more transparent.

In listed companies, executive compensation schemes that yield obscene,
Fastow-like arrangements will be scrutinised out of existence. The
proportion of employees' pensions that can be invested in their employers
shares will be restricted as will the contributions corporations can make to
politicians and their electoral machines. In general, and thanks to Enron's
catastrophe, corporate governance in the US will be better. It may well end
up being an American victory.


WorldCom Shares Sink on News of S.E.C. Inquiry
March 12, 2002

NEW YORK (Reuters) - Shares of telecommunications giant WorldCom Inc.
(news/quote) (WCOM.O) plummeted on Tuesday as much as 19 percent, after the
company revealed securities regulators were probing the company's accounting
procedures and loans to its officers.

The Clinton, Mississippi-based company said on Monday the Securities and
Exchange Commission had requested information on a 2000 charge related to
wholesale accounts, sales commissions, integration of computer systems and
the company's tracking of analysts' earnings estimates.

The SEC also asked for information on multimillion-dollar loans to WorldCom
Chief Executive Bernie Ebbers and others. In an interview on Monday on CNBC,
Ebbers said he had to meet margin calls when the company's share price fell
and the alternative to loans was selling assets that were not easily
convertible to cash.

The company, the No. 2 U.S. long-distance telephone carrier and owner of one
of the biggest U.S. Internet backbones, said it believes all of its
policies, practices and procedures have complied and continue to comply with
accounting standards and laws.

However, that did not stop one major brokerage, Merrill Lynch (news/quote),
from downgrading WorldCom's intermediate term rating to ''neutral'' from
``buy'' and saying the shares have high risk of volatility.

``Given what appears to be a wide ranging SEC inquiry we do not believe it
is appropriate to maintain a positive intermediate-term rating until such
time as we gain greater clarity on the rationale for the SEC's actions and
any possible outcomes,'' Merrill analyst Adam Quinton said in a note.

WorldCom shares fell as much as 19 percent in early trading on the Nasdaq on
Tuesday. They pared that loss 11.7 percent, or $1.05, to $7.96, with more
than 64 million shares changing hands in the first two hours of trading.

For the year, the shares are down about 45 percent.

Shares of WorldCom's MCI Group (MCIT.O) tracking stock, which follows the
performance of its long-distance business, were off 61 cents to $8.55, down
6.66 percent. Since January, the tracking stock is down 33 percent.

WorldCom has been punished of late by investor fears that the company's
slowing revenue growth, competition from local telephone giants and that
overcapacity could result in its demise like many other telecommunications

The company's profits sank 64 percent in the fourth quarter of 2001 and
revenue dropped 11.5 percent. The company also cut its 2002 growth outlook
last month, expecting growth for the WorldCom Group of around 5 percent and
profits in the range of 75 cents to 80 cents a share for the year.


Enron IT: A Tale of Excess and Chaos
By Scott Berinato

Enron's fragmented business units spent money on technology like there was
no tomorrow. And now there isn't.

In October 2000, 14 months before Enron filed for bankruptcy, CEO Kenneth
Lay stood in the auditorium at his Houston headquarters and announced a new
program. Called ClickAtHome, it allowed 15,000 employees to order a new PC
from the company and take it home for free. The PC came with 24-hour tech
support and broadband Internet connections for as little as $15 per month.

Lay received a standing ovation. And why not? Wall Street was keeping
Enron's stock around its high, $80. The assetless trading model that Enron
had pioneered with natural gas futures was rapidly being applied to other
commodities such as bandwidth. Enron had reported $30 billion in revenue in
the first half of 2000-compared with $40 billion in all of 1999. A giddy
Fortune magazine was for the fifth straight year naming Enron America's Most
Innovative Company, as well as the top company for Quality of Management,
number two for Employee Talent and in the top 25 of Best Companies to Work
for in America. Soon, it appeared, Enron would be the nation's
seventh-largest corporation.

At the time, ClickAtHome looked like a relatively inexpensive thank you from
Lay to the hardworking entrepreneurs throughout his company.

But in retrospect, ClickAtHome may have been the pinnacle of Enron's
wastefulness with IT spending. Enron had spent millions to install unused
database tools, build massive trading platforms that some say never worked
and pay outside firms to produce work that Enron could easily have done
in-house. Employees who lauded ClickAtHome at the time now say it was crazy,
because at the time executives knew that Enron's IT was out of control: The
company had already started an enormous centralization of IT to reduce the
rampant redundancy.

At the same time, the business as a whole was spinning out of control.
According to the 205-page Powers Report, written by Enron board member
William Powers Jr. and released Feb. 1 by a special committee formed by
Enron's board after the company's collapse last fall, some of Enron's
partnerships and the debt they hid violated ethical accounting canons. The
report faulted top executives for approving the deals, and it showed that
half a dozen Enron employees made millions of dollars in personal profit
from these partnerships at the expense of the company.

"Rather than thinking in smart business terms, they resorted to this
quasi-legal malfeasance,'' says Jill Feblowitz, service director for the
energy industry at AMR Research in Boston.

While there is no clear and direct link between Enron's profligate IT
spending and its accounting scandal-although both were fueled by same
decentralized, entrepreneurial culture-several experts, including Feblowitz,
believe the situation in IT would eventually have caught up with the

"They were like kids in a candy store with technology," she says. "They
bought a lot of technology, but they never bought a big, soup-to-nuts
system. They worked with an awful lot of vendors, but they also built a lot
of their own systems. If these [accounting irregularities] hadn't come up,
the IT inefficiency might well have come up to bite Enron."

Enron IT was as cutting edge as it was byzantine. There were plenty of great
tools, but there was precious little planning. Any given piece of its
technology was likely to be the best in the world-as much as year ahead of
the curve. And it didn't necessarily integrate with systems that it needed
to work with. Says Randy Wilson, a consultant at KPMG who worked on a team
that logged 30,000 hours of work with Enron, "The systems sucked. They ran a
$100 billion company on Access and Excel."

"We all knew that Enron was out of control," says Linda Richardson, a former
vice president of IT at Enron International who left the company in 1999.
"But after you're in that culture for a long time, you begin to think you're
the one who's wrong."

Value Through Chaos

Enron has always been decentralized. From its early days as a modest oil and
gas company in the mid-1980s through its explosive growth to an energy giant
that defined new ways of making money in the conservative energy business,
the company had set up its business units as silos, or islands.

Data was organized that way too. Each of Enron's operating companies had its
own vice president of IT, and that person was free to dream up his own IT
architecture. The VPs would also budget, buy, develop and maintain their own

"Decentralization allowed us to be more responsive to our customer base,"
says Richardson. "In IT for international, we had to support people on the
road all over the world. We understood what it took to install networks and
international communications links."

When Richardson started at Enron in 1992, Richard Kinder was president, and
he fostered this decentralized culture. Under Kinder's leadership, says
Richardson, Enron appeared to "care more about its employees" than it did
under Jeff Skilling, who became COO and president of Enron in 1996.
Skilling, she says, added a brazenness to the culture.

"He brought in that whole culture of arrogance and attitude that 'We're
Harvard MBAs and we can do anything,'" says Richardson, who is now vice
president of IT for Caminus, an energy software company in Houston.
Skilling, according to several ex-Enron employees, pushed decentralization
to an extreme. He encouraged Enron's business units to compete rather than
collaborate. Practically anyone with an new idea was free to spend money,
steal talent from other business units, and as one IT staffer recalls, "just
do it. Do it until you're told to stop."

According to former employees and consultants who worked with the company,
the way Enron administered IT violated basic management tenets, from cost
cutting to integration to having clear ideas of how data flows through the
network. Sources say that culture of decentralization and speed led to
redundant spending and that different Enron businesses often bought the same
technology without attempting to work with other business units to create
bargaining power or to benefit from economies of scale. Ex-employees talk
about "islands of data," but it was even more random than that. Without
standards, the same data existed in different forms on different islands.
Entire teams were dedicated to the task of deciphering the data.

"The core systems supporting the main revenue-generating activities were
very disjointed," says KPMG's Wilson. "There were major disconnects from
deal capture to risk management to logistics to accounting. They all worked
from different data sources."

Making those different data sources agree when it came time to track sales,
evaluate risk, monitor investments and report earnings was a Herculean task,
according to Jeremy Merritt, an Enron veteran who had several different jobs
at the company, eventually settling in with an SAP support team. "They had
teams and teams of people who had to comb through the data and massage it so
that it made sense," says Merritt. "There was a lot of magic, transforming
apples into oranges and oranges into apples. Preparing annual reports was a

Critics foresaw this as far back as 1999 (read "Reinvent Now," Aug. 15, 1999
http://www.cio.com/archive/081599/reinvent.html). They talked about "the
risky strategy of decentralized IS management" that "threatens to wreak
havoc on the company's computing infrastructure." The notion that the
strategy could backfire was largely drowned out by a chorus of approval from
a multitude of Enron believers.

"I'm not going to debate for a minute that decentralized IS has costs," said
Chief Accounting Officer Richard Causey in the 1999 article on Enron. "But
it has some benefits too." And that was enough to appease most.

Chaos Without Value

To understand the chaos of Enron IT departments, visit the call center.
Merritt's SAP team at Enron decided to support applications other than SAP,
and they branded themselves the Integrated Solutions Center (ISC). Of the
220 ISC staffers, 50 were part of the customer care group. Of that group,
about 10 worked the tech support call center.

Merritt reports that the call center fielded 87,000 internal support calls
in 2001. Assuming a 50-week, 40-hour-per-week work year, this translates to
about 43 calls every hour of the workday for the entire year, or one support
about every 90 seconds. In July alone, there were 12,000 calls.

Why so many calls? First, there were few standards, never mind standard
configurations. IT supported whatever the user happened to have. Also, IT
project approval at Enron was all but guaranteed if you could fill out a
standard online application form and file a report that demonstrated a 38
percent ROI on the project. Tech support was constantly playing catch-up
with whatever the business unit happened to decide to adopt.

The company's devotion to speed compounded the issues. At Enron, things
happened in one-third the time that projects would take at other companies.
One project to integrate sales information with wireless devices went from
conception to deployment in 12 weeks.

Donna Muniz was a Web designer for Enron Online who implemented Commodity
Logic, a system that automated delivery of trading information to traders'
workstations (yet another concept that Enron hoped to spin off into a
revenue-generating business).

"I was always surprised by deadlines," Muniz says. "And in the back of my
head, I was wondering how they could afford all this. They never said 'no'.
If you needed anything, they let you get it so that you could move fast."

But ex-employees say this breakneck deployment of state-of-the-art
technology was done with little regard for a management plan. "We'd get
these modules going and then out of nowhere they would decide to do things
differently," says Muniz, recalling work she did with integrator Valtech on
the website Commodity Logic. "Nothing was planned, it was just done. We'd
get all these horses galloping, and they'd have no reins."

Some IT projects worked, some failed. One particularly expensive failure
came from the Data Technology Group at Enron Networks. In 2000, this group
of 100 invested in a database monitoring tool called Quest Spotlight. The
software was intended to measure database and server performance so the team
could optimize its systems and stop buying new servers if old ones were
available. According to Jose Lazo, who worked in the group, the software
cost $2 million and was installed quickly. But after its installation, it
sat idle for eight months.

"Only about three people total even knew how to use it," says Lazo, who was
hired straight from high school in 2000 and quickly moved up from hardware
support to Enron's SQL database group. Asked why the team invested in Quest
Spotlight, Lazo says, "We just bought the best of everything."

In October 2000, at about the time that CEO Kenneth Lay was receiving a
standing ovation for the ClickAtHome program, Enron was in the midst of a
massive SAP deployment that represented a fundamental shift in the company's

Enron was beginning to centralize management of IT. It had begun with the
SAP project, which had been planned as much as two years earlier. According
to former vice president Richardson, the initial budget was $80 million.
Merritt reports that the SAP system eventually cost $150 million and had an
annual operating budget of $20 million.

As part of the big SAP rollout, functions like accounting and compensation
were being standardized and then consolidated so that Enron, under CIO
Causey, could begin to see the forest for the trees.

According to several ex-employees, Skilling and Causey were the driving
forces behind the about-face. (Both Skilling and Causey declined to comment
for this story.) Another driver was Philippe Bibi, the company's CTO and an
IT executive who enjoyed a certain star status at Enron.

Bibi was a hero for EnronOnline, the energy trading system that generated
most of Enron's revenues and was hailed as a revolution for the commodities
trading industry. (After Enron filed for bankruptcy, UBS Warburg bought
EnronOnline and relaunched it in February as UBSWEnergy.com. Some believed
Bibi's system changed the very definition of a commodity future by allowing
any number of goods (bandwidth, for example) to be traded online. Bibi left
Enron in spring 2001 and is now CIO at Putnam Investments in Boston. He
declined to comment for this article.

Former Enronites could only speculate about why those executives embraced
the countervailing philosophy after more than a decade of aggressive,
premeditated decentralization. The most widespread opinion is that the
highest-level executives had no choice-they knew the situation in IT was
worse than most people imagined. SAP team member Merritt believes the
motivating problem was the reporting of financial data: putting together the
quarterly and yearly reports was such a staggeringly difficult task that the
executive team demanded centralization to make sense of all the silos of
data that had been erected.

By early 2001, Enron had deployed most of the major SAP modules, including
human resources, financial information, asset management and a tax module,
but the company could not rid itself of its decentralized culture overnight.
For some time, the old freewheeling Enron coexisted in an uneasy partnership
with the new Enron. The two systems occasionally clashed, as they did with
the deployment of an SAP tool called the cross-application time sheet

CATS was supposed to help employees track their project hours. Enron wanted
this tool to be part of a Web front end to SAP's HR module, called
eHROnline. But in typical old-Enron fashion, the time line for the project
was compressed. CATS was hastily patched onto the portal, and it reportedly
didn't work well. Anyone who worked on more than a few projects was
powerless to track hours.

Merritt's SAP team took a look at the system because, as Merritt says, "This
is the module that arguably touched the most peopl, and it was giving us a
black eye." Merritt wrote up a formal spec that estimated fixing the CATS
module at $176,000. It was never fixed, he says, because the director who
ought to have fought for the project was unable to get the ear of the people
who were approving projects.

By the summer of 2001, the effects of centralization could be seen in many
parts of the company. Enron Networks had seized control of the IT support
for two business units. And Enron Energy Services was consolidating eight
separate billing systems it used into one centralized system-a massive
effort dubbed Project Genesis.

The company was also creating standards for the first time. Causey, IT
staffers say, was behind much of this. Eventually Enron Networks planned to
disburse those standards as binding rules throughout the company.

One thing that the company standardized was the handheld devices for
traders, starting, typically, with a luxury model-a $1,000 Compaq iPaq with
a wireless network card.

In the database group, Lazo had also shifted his attention to
standardization and centralization. He was trying to halt the proliferation
of new databases at Enron by first consolidating them and then standardizing
their management plan.

It had been common practice, souces say, for workgroups at Enron to buy a
server whenever they thought they needed one, even if there was server real
estate available somewhere else. Lazo's job was to corral all of the
databases splattered throughout Enron. Lazo would walk through buildings and
look for them, or he'd call people on the phone and ask them about what
hardware and software they used. "We'd have a team of 10 buy their own
server and use it themselves," Lazo says. "A small accounting group turned
up with a $50,000 server. It was just sitting there. No one knew what it was
for. We found databases that no one could identify or take ownership of."

Lazo says he finally felt that he would finally be able to impose some order
on Enron's IT sprawl, but his efforts came too late. The goal of a
centralized data center was a 2002 project. And "before we could get to that
point." Lazo says, "well, you know what happened."

Wisdom Too Late

Last year, just before Enron collapsed, there was some evidence that
centralization was working, at least in the information technology ranks.

"SAP brought a standard to the table, and everyone was using it for at least
some of their transactions," Merritt says. "We were just heating up. We had
standard call center procedures and we were about to do the cool stuff, the
data mining. We were right at the cusp of a total quality program. We had
completely shed our baggage."

In three months, Merritt had managed to cut support calls by 25 percent-from
12,000 to 9,000. He achieved an unprecedented 93 percent satisfaction rate
with call center customers under the new model. He reported these results
with a newly standardized reporting system, which gave executives-quite
possibly for the first time-a clear view of one of Enron's IT landscapes.

Merritt had even begun to think that Enron could brand the ISC's standard
procedures and turn them into something Enron could sell to other companies.
"We were on a roll," Merritt says. "We had a good thing going. And then, the
rug was ripped out from under us."

The rug of course, was also ripped out from under Web designer Muniz, who,
like most employees, was fired in December 2001. One month later, she
finally got around to opening a box that had been sitting in her home office
for months. It was a new PC with a large monitor, courtesy of the
ClickAtHome program.

Inside Enron: Traders Rule

Value through chaos was the unofficial motto of Enron's decentralized
culture. Not surprisingly, the chaos was greatest where the value was
highest. The most profitable business units were the most technologically
out of control.

This explains the lavish waste of Enron Capital and Trade (ECT), the most
successful Enron subsidiary. ECT could do what it wanted because that was
where the traders worked, and the traders were the ruling class.

"I was waiting for the day that they'd build a special elevator for traders
so they could get to and from lunch more quickly," says Jeremy Merritt, an
Enron IT veteran.

To work tech support for traders was an important job. And there were rules.
A service-level agreement dictated that support calls from traders required
an under-10-minute response time. Whatever technology the traders wanted,
traders got. There were no standards.

In Enron's heyday, the average trader packed about $20,000 of infrastructure
on his desk in the legendary traders' room at Enron's Houston headquarters.
Traders were using four different types of wireless devices at the same
time, and IT was supporting them all. They indulged in high-end
dual-processor workstations and $2,000 flat-screen panels. Some IT staffers
report that traders who fit 12 such screens on their desks, although the
average seems to have been about three or four.

Inside Enron: A Consultant's Dream

Enron's IT chaos didn't stop at the company's walls. It extended to third
party vendors. Sources report that even if Enron didn't need a consultant or
integrator, empowered and ego-driven middle managers would routinely hire
one. Web designer Donna Muniz recalls two incidents when her bosses hired
outside companies and paid them hundreds of thousands of dollars to do work
her group could have done.

On the Commodity Logic website design, Muniz recalls, "Out of nowhere, they
hire this California firm [Organic] to do some design work. They fly them
out three times. We promise to pay them $100,000 to design the look of five
pages." Muniz was put on the board that approved Organic's work. Privately,
Muniz says, she fumed. She says that there she was, in meetings approving
money for subpar work that her team was capable of doing.

"I asked [my project manager] lots of times," Muniz says, " 'Why are we
doing this deal? I can do this work,' But my views never got past him.
Eventually, I figured out Enron wanted to, I don't know, show off. They
wanted to use firms that were popular. This design firm was hot at the

Anthony Huang, CEO of the wireless consultancy Rexton Media, handled eight
wireless initiatives for Enron, mostly for the Enron Energy Services (EES)
business unit. Huang characterizes Enron's decentralization and chaotic IT
infrastructure as a consultant's dream. Imagine a world, he says, where
consultants are paid to create incongruous and overlapping systems, knowing
full well that eventually someone will have sort them out.

"We had a sandbox set up to pilot one wireless project, and we tried to make
the service available to other business units," Huang says. "We'd say, 'Look
how well this worked in Enron Energy Services.' But the other business units
would set up their own sandboxes. I mean, it's the same sandbox, but they
built their own."

"It went on and on," Huang says. "You'd end up with three different versions
of the same software in three different business units."

Workers Unite, Overnight

Jose Lazo was fired from from his IT job at Enron on Dec. 4, 2001. As CEO of
wireless consultantcy Rexton Media, Anthony Huang had also been
unceremoniously dumped by the company. Lazo called on Huang at about 8
o'clock that night, looking for work. Huang couldn't hire him but offered to
help him set up an ex-Enron employee advocacy site. This is what happened

8 p.m.: Lazo and Huang search for a domain name that won't present copyright
issues. They buy "Enronx.org"-the .org to demonstrate their nonprofit,
worker solidarity tilt-for $35 from Register.com.

8-9 p.m.: Figuring they can't afford an ISP to host the website, Huang and
Lazo call on a Texas IT advocacy group-called Techxans.org-to host the site.
Techxans offers up a small bit of server space, and Lazo and Huang point the
Enronx.org domain to that server's address.

9:36 p.m.: Jose Lazo posts the first message at the Enronx.org Yahoo!
discussion board, even before the site is finished. There would be 10 posts
by 2 a.m.

3- 8 a.m.: Lazo, Huang and three others start filling Enronx.org with
content. A company with some interface design in exchange for ad space.
"Enronx.org: Discover the power of WHY NOT" reads the title bar with an X
logo bastardized from Enron's E. The GUI is meant to poke fun at Enron. The
conference room design is taken from an actual conference room at Enron
headquarters. A picture of a football player with a drooping gut is
included. That picture of a fat, immovable object is meant to mock Enron's
website, where a bicyclist, blurred by speed, is depicted.

8-8:30 a.m.: Lesley Plotkin, in public relations for Techxans.org, writes
and distributes a press release hyping Enronx.org.

9 a.m.-noon: Lazo and Huang continue to fill the site with content, and they
strike deals with companies to place ads on the site at $300 a pop.

Noon: A local television station arrives to film a news story about Lazo,
Huang and the new site.

The next day, 400 employers called to post jobs. Then, law firms thinking
about class-action suits set up camp. Before long, there was more content
than Lazo and Huang had imagined, including insurance information, basic
workers' rights links and even a temporary grocery service through Kid Care,
a nonprofit that fights childhood hunger.

In the first 24 hours of Enronx.org's existence, there were 129 posts to the
message board. By mid-February, there were more than 4,000. About 4,200
ex-Enron employees became members in the first five days. The site peaked at
6,000 members in seven weeks. Currently, about 15 people opt-in per day,
while five opt-out. And it's not just ex-Enron employees who become members
of Enronx.org. There are many interested third parties joining or just
watching the dialogue at the site's discussion board. Huang says the U.S.
attorney general's office has opted in as have countless members of the
media. Even Senators' aides are members.

Lazo and Huang have added a newsletter, in which they highlight posts from
the message board and link to important news articles. That newsletter is
delivered for a nickel per member. The newsletter also scored the duo their
first big mistake: They had been highlighting comments from forum members
who didn't want their comments highlighted. The media was picking up on
this, and some members lost private information to the media.

Huang laughs nervously. "We didn't have a privacy policy. Now we do."

Huang and Lazo have spent $47,000 and have taken in $23,000. Their next goal

is to launch an effort called the Enronx Fund to garner financial assistance
for those ex-employees in need.

Enronx.org demonstrates that despite our new cynicism about the Web, its
speed and universality can be harnessed for those in dire straits or those
looking for power in numbers. Workers can get more information, network with
more potential allies and unite more quickly than ever using a Web
portal-even one that was set up in one night.

"How long will it go?" Huang asks. "To be frank, I don't know. We thought it
would go three months. It looks more like a year now. This is absolute grass
roots, though. This is the American way done right. People get trashed by
the bureaucracy, and now we can demand our rights. The money we spent, it's
worth it."

Do you have an Enron IT story to share? Let Senior Writer Scott Berinato
know about it at sberinato {AT} cio.com.


9. In the age of Enron, being duped is now all the rage
By ROBERT TRIGAUX, Times Business Columnist
St. Petersburg Times published March 1, 2002

We was duped!

In the recent flood of "It's-not-my-fault" confessions over the collapse
of Enron and other faltering businesses, take note of the exploding
popularity of the word duped.

Four Wall Street analysts, the supposed watchdogs of Enron for
investors, spent Wednesday before a Senate panel saying they were duped
like everyone else about the energy company's finances -- even as they
kept issuing "buy" and "strong buy" recommendations.

"I never duped (Enron chairman) Ken Lay," ex-Enron chief executive Jeff
Skilling told a Senate panel Tuesday.

Enron whistle-blower Sherron Watkins said in testimony she believes Lay
was duped by Skilling and Enron ex-chief financial officer Andrew Fastow.

Outside accounting Arthur Andersen claims it was duped by misinformation
from Enron into approving its arcane financial deals.

Enron director and audit committee chairman Robert Jaedicke, an
accounting professor emeritus at Stanford University and former dean of
its graduate business school, told congressional investigators that
Enron executives duped board members and withheld key information.

Enron employees, whose 401(k)s were stuffed with company stock, were
duped by Lay's promises last fall that Enron was sure to rebound.

Even investors who lost money on Enron are angry because they were duped.

For a company that rose so rapidly to become one of the nation's top 10,
that's a whole lot of duping.

But in what is fast emerging as the Year of the Dupe, Enron has plenty
of company:

At the now-bankrupt Global Crossing, now beset with SEC and FBI
investigations into questionable deals that potentially inflated the
company's revenue and stock price, many employees say they feel they
were duped.

In Florida, federal regulators accuse backers of self-described
television psychic "Miss Cleo" of using deceptive TV ads to scam as much
as $360-million from hotline callers. Florida Attorney General Bob
Butterworth said his state wanted fines of up to $10,000 per incident
plus refunds to customers who were duped.

The federal government this week acknowledged mismanaging the trust
system that collects and distributes royalties to American Indians. U.S.
District Judge Royce Lamberth said he had been duped by Interior
Department officials into believing reform was working.

Venezuelan President Hugo Chavez accused his political enemies of trying
to turn the U.S. government against his rule. "I am sure that the organs
of power in Washington are not going to let themselves be duped or
manipulated," he said.

Fading action hero Sylvester Stallone filed a $17-million suit against
his ex-business manager who, Stallone says, duped the actor into hanging
onto his Planet Hollywood stock, even as the theme restaurant's share
price tanked and the company went bankrupt.

Hey, even the classic first-grader's excuse ("the dog ate my homework")
seems in need of an update. "Teacher, I was duped into forfeiting my
homework to an omnivorous canine."

Can't anyone accept some accountability? Have we become a world of dupes?

ENRON, THE SOAP OPERA: Amid all the controversy over Enron's bogus
financial partnerships, some senior company managers were apparently
also busy with personal partnerships.

The Washington Post says that after divorcing his first wife, former
Enron CEO Jeff Skilling took up with an Enron secretary whom staffers
called "Va Voom" behind her back. Now Skilling's engaged to Rebecca
Carter (a k a Va Voom), who under Skilling was promoted to executive
secretary to Enron's board of directors at a salary of $600,000. And
Enron executive Lou Pai, who cashed out more than $300-million in Enron
stock, reportedly indulged his second wife (whom he met in a strip club)
and her passion for fine horses by purchasing a 77,500-acre ranch in
Colorado . . .

MAYBE 2 PLUS 2 CAN EQUAL 5: "Slight-of-hand and revenue reporting
strategies." "Nine ways to say earnings -- which is the best?" Are these
phrases from an Enron guide to accounting? Or maybe Global Crossing's
internal tips to phony figures? Actually, these are actual courses
provided in an accounting seminar put on by the National Center for
Continuing Education -- in Tallahassee.

What a coincidence! While Enron's collapse will cost the Florida state
pension fund hundreds of millions of dollars, an organization in our
state capital is training accountants with "50 tricks and traps of
managed earnings that you need to know to excel at your job and stay out
of trouble."

(see also: http://biz.yahoo.com/rb/020227/business_enron_congress_dc_2.html)


10. Enron Designed Fake Trading Floor
Former Employee Claims No Trades Transpired
1:22 p.m. CST February 22, 2002

 HOUSTON -- The bankrupt energy giant, Enron Corp., designed and
 maintained a fake trading floor at its Houston office.

 According to former Enron employees, on the sixth floor of the company's
 downtown headquarters was a set, designed to trick analysts into
 believing business was booming.

 "It was an elaborate Hollywood production that we went through every year
 when the analysts were going to be there to be impress them to make our
 stock go up," former employee Carol Elkin said.

 Elkin worked for Enron for five years as an energy analyst. She was once
 even commended by then-Chief Executive Officer Jeffrey Skilling.

 Elkin said that the phony trading room was staffed by her and other
 employees to resemble a real trading operation.

 "They would build out the sixth floor of 1000 Smith in what I called a
 Hollywood set," Elkin said. "They would build out a set with a big,
 36-inch flat panel screens and the teleconference conference rooms."

 Elkin said that it was all an act, and that no trades were actually made
 there. The people on the phones were talking to each other.

 "They would ask us to go alternately, in like hour shifts down to the
 sixth floor," Elkin said. "And sit and pretend that we lived and worked

 Elkin said that it fit the company's culture that Enron couldn't just be
 a good company -- it had to appear at least, to be the best, even if the
 truth was all smoke and mirrors.

 "It was absurd that we were doing this," Elkin said. "But to me the most
absurd part was that it worked." Elkin is now one of many employees that are
suing Enron, hoping to recover 401k savings that were lost when the company
collapsed. Enron did not comment about the fake trading room.


11. Trouble ahead, trouble behind
By Rachel Konrad Staff Writer, CNET News.com

February 22, 2002, 12:00 PM PT

The co-founder of the 12-year-old Electronic Frontier Foundation (EFF) tries
not to be bleak. But he sincerely worries that Microsoft will usurp
e-commerce and AOL Time Warner will seize media, and the two forces will
extinguish dissenting voices in a "diabolical" plot to own the economy and
the human mind.

But Barlow, perhaps best known as a lyricist for the Grateful Dead, isn't
entirely forlorn. He's optimistic that courts will soon strike down the
Digital Millennium Copyright Act (DMCA), a 1998 agreement that banned online
distribution of companies' intellectual property. And he's hopeful that
Microsoft Chairman Bill Gates--the smartest man Barlow says he's ever
met--will hatch a plan to control the Internet that is so ridiculous that it
will spark a public boycott that ultimately will topple the software giant.

The 54-year-old owner of an Apple PowerBook--festooned with Grateful Dead
bumper stickers--sat down to chai tea in his rent-controlled apartment
overlooking San Francisco. Donning black leather pants, cowboy boots, a
turquoise necklace and a cell phone earplug, the self-declared "techno
hippie" talked to CNET News.com about dot-communism, cattle ranching and the
hallucinations of the masses.

Q: What does a self-titled "cognitive dissident" do all day?

A: I'm spending an enormous amount of my time stopping content industries
from taking over the world--literally. I feel like we're in a condition
where private totalitarianism is not out of the question because of the
increasingly thickening matrix of channels of communication owned by the
same companies that own content, that own Web properties, that own
traditional media.

In essence, they're in a position to own the human mind itself. The
possibility of getting a dissident voice through their channels is
increasingly scarce, and the use of copyright as a means of suppressing free
dom of expression is becoming more and more fashionable. You've got these
interlocking systems of technology and law, where merely quoting something
from a copyrighted piece is enough to bring down the system on you.

Which companies or organizations constitute this totalitarian regime?
Microsoft, AOL, the MPAA (Motion Picture Association of America) and the
RIAA (Recording Industry Association of America), not to
mention...Panasonic, Intel--basically, large corporate capitalism in a
completely unregulated environment.

I'm a free marketer and I'm not a fan of regulation. But I'm very concerned
about what happens when you have these large organisms with no conscience.
And why should they have a conscience? They're not human, and they can
operate globally without any constraints.

What dissenting stories aren't getting published? What communities aren't
being built because of corporate totalitarianism?

That's just it: We don't know. We've reached a point where the media are so
owned by the large corporations and they live in this tight loop where
practically all they can convey is what is already believed. I believe that
mass media exists to confirm the hallucinations of the masses. If you want
to get a story through that doesn't sync up with the dominant belief system,
it's just not going to happen. So who the hell knows what else is going on
out there?

After totalitarianism, what's the next biggest battle brewing in cyberspace?
There are a lot of things connected to totalitarianism, such as the ability
to affect the technical architecture of the Net and the increasing number of
standards and protocols that are being passed down by the likes of
Microsoft. I worry that the Net is closing. I would say that (Microsoft
e-commerce initiatives) .Net and HailStorm are huge threats and really
diabolical. The problem is that hardly anybody recognizes it because they
don't know what .Net is or how it works. They don't know that Microsoft is
trying to own all of your transactions, literally.

To play devil's advocate, isn't Microsoft simply selling a product that
millions of people are willing to purchase at their own will?

Oh, come on. People aren't willing. Microsoft is giving people what
Microsoft wants because it has a monopoly, which isn't based on the value of
the product but rather a positive feedback loop in the information economy:
Everything is compatible with Windows, ergo, Windows prevails and continues
to prevail regardless of its liabilities. It's No. 1 because it's No. 1,
period, not because it's valuable. In fact, it's become totally diabolical.

If Windows is so bad, why does Apple have a meager 4 percent market share?
Four? Really? Jesus. They really blew that one.

You've been heavily involved in wiring Africa for Internet access. But
increasingly, it seems, a new digital divide has emerged--not between the
rich and the poor, but between the people who give their consumer data, such
as credit card numbers, to corporations, and the privacy zealots who refuse.
If this is true, what's the future for the zealots?

That's the new divide, and it's not pretty. I have old hippie friends who
refuse to have a credit card and pay for everything in cash and are not
essentially engaged in the modern terms of society--and they're living
accordingly. They live in shacks in Humboldt County (on the rugged Northern
California coast), which is all they can handle because there's so much
friction and overhead in their economy that they can't live on a competitive
basis with the rest of us. The people who don't opt in will basically have
similar lives, be similarly disengaged from society.

Presumably, you'll do more and more purchases online, and presumably,
Microsoft will make it more inconvenient for you--unless you provide your
consumer data to Passport (the company's database of customer information).
At some point, are you going to cave and provide Microsoft your credit card
and other data? I don't know. (Long pause. Heavy sigh.)

I'm really worried about this, and I keep praying for guidance. These are
really dark times. On practically every front that I care about, the voices
of the foes are winning. I have a beleaguered optimism that this isn't going
to continue to be the case, but this is a time to have your faith tested,
that's for sure.

You paint a pretty gloomy picture. How can we stop Big Brother Inc.?

People could simply boycott the products. Frankly, I think anybody's a fool
to put (Microsoft operating system Windows) XP on their computer. It's like
installing a continuous, 24-hour monitor on your mind. But people are doing
it like crazy because they don't know any better.

But again, if this is so nefarious, how do we stop it?

In some respects, I've had to rein in my horns a bit to figure out what to
say that's constructive--as opposed to saying the sky is falling, even
though it is. Basically, I just can't come up with a plan to keep the sky up
there. I hope that enough people will become aware of what's going on.

And one thing I've noticed about monopoly in the information world is that
while this arena is extremely favorable to growing monopolies very quickly,
it's also favorable to disintegrating them. I remember a time not that long
ago, when 80 percent of all computers on the planet were dedicated
WordPerfect servers. Unless you go to a law firm, you aren't going to find
any of those now. So I have some faith that, at some point, Microsoft would
do something that is so outrageous that they simply alienate the
marketplace, and at some point, Linux or some substitute will take over.

Let's talk about copyright laws, which you hate. How would musicians and
other artists make a living if, in your perfect world, copyright law was

You as a journalist produce copyrighted material for a living. You don't
make your living on the basis of royalties--and there are very few human
beings who do. Royalties are things that get paid to organizations and
institutions that have thieved royalties from human beings. The idea that
royalties need to be there to "incentivize" creativity is pretty abstract
these days.

What you get paid for is the delivery of service. If you're talking about
services, it's best not to view what is being served as a form of property.

So should the music industry adopt a publishing model, in which companies
give away a newspaper for 25 cents or publish on the open Web but collect
revenue from advertisers, referrals or other sources?

In the case of the music industry, the model is already well established: If
you're a performing group, you make your money off of performance primarily,
but not exclusively.
The Grateful Dead invented viral marketing without really meaning to...We
gave our music away. At the time, we did it because we felt there was no way
to stop Deadheads from taping it, and besides, we weren't in it for the
money, because we weren't making any. But those tapes became the androgen of
our success. They spread that virus all over the damn place, and by the time
we died, we were the largest-grossing entertainment act in the business
because of performances, but not exclusively.
The interesting thing is that our records weren't nearly as good as the
tapes that a lot of Deadheads made, but they all went platinum. There is a
desire on the part of the fan base to actually own the physical objects, in
addition to having the music to play.
But I've been to a bunch of Dead shows and know that no other band conducts
concerts like the Dead. How do talented musicians who can't tour as well or
as often make money?

Most bands perform. If you allow your music to freely circulate and use it
as advertising, it's a big help. Paradoxically, you can allow your music to
freely circulate and still sell it if people are willing to pay for your
encapsulation of it and for convenience.

I'm writing now for String Cheese Incident, which is like Grateful Dead 2.0,
and they're getting big very fast. Their audience has quadrupled in the past
year...They've been making their board tapes available online for some time.
At the same time, they have a system where they'll ship you CDs of the
concert. People are buying them--in spite of the fact that they can download
the music.

You lived in San Francisco in the late '60s and '70s when the Dead were
giving free concerts in Golden Gate Park and it was all about free love and
be-ins. How has the Bay Area changed--particularly in light of the late
1990s dot-com invasion?

San Francisco is one of the most pathological cities on earth. The people
who live here lost their sense of human connection (in the '90s). The city
was completely emptied of diversity at a certain point, and the entire
population that came in were suburban kids who had never lived in any city
or town or community in their whole lives. They had no sense of community.
It's now a place where if you give eye contact, you get maced.
The culture that has come up around the economy--and I admit I've personally
tried to build this economy--is a culture that I can't stand. It's a good
thing I have a sense of paradox. But I really don't like the society that
has grown up around the dot-communists, who are all products of suburbia and

So when the tech industry imploded and all the dot-communists lost their
jobs, returned to business school or groveled in blue-collar jobs, you

Hey, it hurt me too. Being an Internet guru isn't what it used to be. I
lost probably 95 percent of my net worth. But it's been good for the
Internet, and in the long term it's going to be very good for the
dot-communists. Never has there been a time when there are so many young
people who have been poor and then rich and then poor again. I think it's an
educational experience that teaches you what's valuable in life. To have a
whole bunch of money at a really young age and see how completely useless it
is--it trains a lot of folks in the real value of things.

What was the big economic lesson you learned from the tech collapse?

The whole dot-com thing was an effort to use 19th and 20th century concepts
of economy in an environment where they didn't exist, and the Internet
essentially shrugged them off. This was an assault by an alien force that
was repelled by the natural forces of the Internet.

So through the Internet we're creating a new economic paradigm--like the
15th century transition from feudalism to capitalism?

Yes. Exactly.

We're transitioning from capitalism to what?

It's more of a gift or barter economy than we're used to, and it's much more
decentralized--a place where the buyer and seller are much more obscure. In
the early '90s, people were saying, "This Internet isn't going to go
anywhere because there's no economy there, no way to make money there." I
would say, "Wait a minute. There are people entering trillions of keystrokes
into this database. There's an economy there--but it just happens not to be
There was this belief that you made money from market cap, and there was no
difference between a venture capitalist and a customer--that if you sold
your product to a VC you were one step further toward your final goal, which
was a ridiculous IPO, following which you'd liquidate and spend the rest of
your life chasing starlets on the Riviera. This is not a good reason to
start a business. Business should be about the simple proposition of
creating a product or service that costs you less than you can sell it for.
For a long time, we forgot that.

Do you blame yourself at all for fueling the Internet bubble?

Well, yes. I'm doing a piece now for Forbes about the economics of humility
and admitting my own errors in all of this, and trying to evaluate where to
go because we've so massively screwed up.
In fairness, I've always claimed that the long-term effects are going to be
far more profound than the short-term effects. At the same time, I was
certainly one of the primary promoters that this was the biggest thing that
had happened since the capture of fire. I still believe that. But I take a
slightly longer-term view of it. The capture of fire didn't revolutionize
human society in five years. It took thousands. In this case it's going to
take a minimum of a century. These initial exuberances were probably
counter-productive, and I fully confess to having fueled those fires.

How do you want to be remembered?

I want to be remembered as someone who did everything he could to keep the
Net open and build an architecture for the future that has as its foundation
principles of openness and free flow. I want a future where anyone can say
anything they want.

You co-founded EFF for that purpose. Is there still a need for it?

Absolutely. More than ever. I don't know who would be fighting these fights
if not for the EFF. We need to get rid of the Digital Millennium Copyright
Act--that is one of the principal tools of repression. That has to be
removed from law, as well as its European equivalents. The EFF is the
primary force to make that happen.

I'm convinced that liberty exists in the public's willingness to exercise
it. And if people are timid, they're not going to exercise their liberties,
and they'll lose them. We have an extremely important function in making
people feel there's an organization for them if they want to be brave.

Do a series of mounting attacks on the Digital Millennium Copyright Act give
you confidence that copyright laws will someday be struck down?

Yeah. They'll get rid of the DMCA because it's unconstitutional. And at some
point, we'll get to a level where the courts agree with us. It's clearly a
violation of the First Amendment, and it's being used to create all kinds of
secondary violations. I just can't believe that a court could continue
counting putting a link to a text file as a criminal act in the United
States of America.

You've been a Wyoming cattle rancher, a Grateful Dead lyricist and an
Internet guru. Which career did you enjoy most?

I liked being a rancher more than anything else. I'd still be doing it if
there were any conceivable way to afford it.


12. Rotten to the Core
By Russell Mokhiber and Robert Weissman

Frank Easterbrook and Daniel Fischel are University of Chicago law
professors who believe that, when it comes to making profits, nothing --
not even the law -- should stand in the way. (For almost two decades,
Easterbrook has also been a federal appeals court judge.)

Twenty years ago, writing about antitrust crimes in the Michigan Law
Review, Easterbrook and Fischel, then both professors at the University
of Chicago, wrote that managers not only may, but should, violate the
rules when it is profitable to do so. And it is clear that they believed
that this rule should apply beyond just antitrust.

In a nutshell, this is the Chicago School view of corporate law that has
taken hold over the past 20 years.

Under this view, if a Fed Ex truck needs to double park to make a
delivery -- double park. No problem. Pay the $20 fine.  Just as long as
you are still making money, violate the law.

Or course, when it comes to corporate crime and violence, we aren't
talking about just double parking.

We're talking about fraud, corruption, pollution, price-fixing,
occupational disease, and bribery.

The Chicago School says these are "externalities" and related fines and
penalties should simply be viewed as the "costs of doing business."

We call these activities crimes, and we believe society imposes
penalties for committing these crimes to deter and socially sanction
those who would violate society's proscription.

Lawmakers of both parties are shamelessly portraying Enron and Arthur
Andersen as rotten apples, even though those same lawmakers were just
until recently on the take from both corporations, and doing the dirty
work of defeating laws that would have governed both.

But of course we are not talking about a couple of rotten apples here.

As Easterbrook and Fischel so clearly show, the corporate world is now
governed by an ideology that is rotten to the core. After all, as the
great Chicago professors teach us, it is the duty of managers to violate
the law when it is profitable to do so.

Now, the stink has risen. And slowly, but surely, and hardly noticed, a
counter-Chicago movement in corporate law is bubbling up from law
schools around the country.

At Boston College Law School, Professor Kent Greenfield points out that
it used to be that corporations were created by the state to achieve
specified public goals. The corporation was created to build a canal,
for example. And then it was to go out of business.

If the corporation decided to sell hot dogs instead, it was acting
beyond its powers, and a shareholder or the attorney general could file
an injunction under the "ultra vires" (beyond its powers) doctrine --
forcing the company to drop the dogs.

Then, the states started to compete with each other for more corporate
business -- the infamous race to the bottom. As a part of that race,
states stopped imposing strict limitations on corporate powers.

The corporate lawyers set up Delaware as the Las Vegas of corporate
chartering. And as a result, virtually no corporate activity was beyond
a company's defined activity. Ultra vires was dead, was the common view.

Greenfield steps in and says -- wait a minute -- illegal activity is
still "beyond the power" of corporations. State incorporation statutes
and articles of incorporation almost invariably charter corporations
only for "lawful" purposes.

He wants attorneys general and trial lawyers to look carefully at the
possibility of bringing ultra vires lawsuits against officers and
directors of corporate criminals.

At Washington and Lee University, law professor David Millon says that
underlying the assorted debates over the nature of the corporation are
differences of political opinion.

So, those who see the corporation as a creation of the state do so
because we want to see strong public control.

Those who see in a corporation nexus of private contracts (the Chicago
School) see it that way because they want to defeat public regulation.
(The charter of incorporation is like a birth certificate, and nothing
more, they argue.)

This new breed of corporate law reformers, represented by the likes of
Greenfield, Millon and Lawrence Mitchell of George Washington University
Law School, does not go as far as we would in sending the corporation
back to the public woodshed.

But it is good to note that, after years of bowing in subservience to
the giant corporatists of the Midwest, a handful of law professors are
beginning to agitate against the regressive theories of their Chicago
School colleagues.

Their task is simultaneously difficult and easy. Difficult, because the
Chicago School has been so successful in winning the academic -- and
eventually legal -- debate about what corporations are and how they
should be governed. Easy, because the Chicago School claims are so
extreme that the reformers can win the debate -- or at least
significantly shift the pendulum in the field -- by convincingly arguing
simply that corporations should follow the law.

This article is posted at:


Blowing The Whistle

By Caroline E. Mayer and Amy Joyce
Washington Post Staff Writers
Sunday, February 10, 2002; Page H01

As America watched Enron Corp. officials sweating in the Washington
spotlight last week -- swearing ignorance of misdeeds, pointing a
finger at others or simply taking the Fifth -- there was the
predictable buzz in the air. But above the clicking of cameras and
the low rumble of lawyers conferring with clients, there came another

Was it the echo of whistles being blown elsewhere in the country? Is
it wishful thinking on the part of fearful stockholders, or might the
spectacle of management in the hot seat this time embolden a new
flock of corporate canaries to sing in alarm when they discover their
company's cooked books, discriminatory practices or less-than-lawful

While every worker with a 401(k) plan or individual retirement
account quakes, wondering when and where the next corporate bomb will
detonate, will uneasy employees come forward, whether it's to keep
their company from being Enronned or to save their own jobs or,
maybe, just to right wrongdoing?

Employees contemplating blowing the whistle may be tempted to take
some courage from Enron Vice President Sherron Watkins, who last
summer and fall explained her misgivings, first anonymously and later
in person, to Enron Chairman Kenneth L. Lay. She told him she was
"incredibly nervous" that the company might "implode in a wave of
accounting scandals."

And there's Margaret Ceconi, who e-mailed Lay saying the company had
"knowingly misrepresented" the earnings of one of its major

And the congressional hearings revealed that concerns were also
raised by Jordan Mintz, Enron's vice president and general counsel
for corporate development. As the corporate lawyer whose job it was
to scrutinize deals, Mintz not only questioned whether Enron's
tangled partnerships were fair to investors but also sought the
opinion of outside lawyers.

Ceconi no longer works at Enron, but Watkins and Mintz do. That's
remarkable in itself. What's more, Watkins has a new, larger office
at Houston headquarters, and Mintz has been promoted -- outcomes that
are not the norm for most corporate challengers, who often find
themselves in a smaller office, less important position or, most
likely, out of a job. (It no doubt helped that the company's collapse
was so swift that Watkins and Mintz outlasted the top officials who
might have swatted them down.)

While some call the Enron employees whistle-blowers, others adamantly
say that's not the case, given that they never took their concerns

But no matter what label you apply to them, is it possible that their
examples signal a new moment for corporate challengers?

Some employees appear to think so, as they dial into special
telephone hot lines to report concerns about their companies.

Two of the nation's largest firms that maintain hot lines for other
companies report a noticeable increase in employee calls. At
Pinkerton Consulting and Investigations, which handles hot lines for
about 1,000 companies, calls have risen by 12 percent since the Enron
scandal came to light. At Network Inc., which operates toll-free
lines for about 650 companies, there's been an even larger spike,
with calls up 35 percent.

"I can't say scientifically it's all due to Enron, but there's
clearly a spike of interest in our services," said Network's
president, Ed Stamper.

Pinkerton thinks there's more to come. "I think employees will
recognize that ignoring issues or misconduct in the workplace may in
fact come back to impact them," said Clifford Thomas, Pinkerton's
vice president of compliance services. "It may eventually affect
their livelihood or, worse yet, their retirement nest egg."

"The current cultural climate" has changed, said Myron Peretz Glazer,
a professor of sociology at Smith College who with his wife, Penina
Glazer, wrote a book about whistle-blowers a decade ago. There's a
feeling that "there are serious problems, and we want you to speak up
and there will be a lot of support for you."

Yet the new era for whistle-blowers may only be transitory. "There's
always a spike" in complaints after a big scandal, said John P.
Relman, a Washington lawyer who has represented many employees in
discrimination suits, including Secret Service agents against the
FBI. "A lot of people feel empowered when something like this happens
and they see themselves as having a little bit of protection." But
that feeling lasts only a limited time, he added.

That's partly because would-be challengers have seen throughout the
years that there are powerful forces arrayed against the outlier, the
naysayer, say lawyers and public interest advocates who have worked
with whistle-blowers. They see that most corporate tattletales are
not as fortunate as Watkins. More often than not, company gadflies
are, quietly and privately, fired. No congressional hearings, no
public uproar, just termination.

Consider the case of Roy Olofson, who was vice president of finance
for Global Crossing Ltd., the telecommunications firm that filed for
bankruptcy on Jan. 28.

Last August -- the same month Watkins sent that now-famous letter to
Lay -- Olofson wrote to Global Crossing's general counsel alleging
that some of the firm's accounting practices inflated the company's
revenue. He was placed on paid administrative leave within a few
weeks and fired at the end of November.

Global Crossing says the 63-year-old Olofson was let go as part of a
substantial reduction in the company's workforce. The company added
that his accusations were investigated, found to be without merit and
are only being raised now as part of an effort by Olofson to win a
multimillion-dollar settlement for wrongful termination. That charge,
in turn, has prompted Olofson's attorney to accuse Global Crossing of
running a "carefully orchestrated smear campaign to divert attention
from Global Crossing's accounting irregularities." The Securities and
Exchange Commission is now investigating Global Crossing's books --
as well as Enron's.

Yet the mushrooming impact of Enron's downfall -- as it prompts other
companies to restate earnings and causes nervous investors to sell
off stocks -- may overshadow Olofson's experience and encourage other
employees to come forward, at least for now.

"If people see high and mighty, even arrogant companies like Enron,
being brought to justice, maybe they will have the courage to stand
up and say, 'I'm not going to be a part of it,' even though it
presents a great risk in the long run, a real ordeal," said John
Phillips, a Washington lawyer who has represented hundreds of
employees who have accused their companies of defrauding the

Some of the complaints will be lodged by sincere do-gooders who want
to right a wrong. But not all, said Myron Glazer. Many employees may
come forward, he said, "for fear of being implicated" in whatever
corporate shenanigans eventually come to light.

'Talk to a whistle-blower or a lawyer who has represented one and you
almost always hear the same statement: "Whistle-blowing is a life-
changing event." The reason is simple, according to C. Fred Alford, a
University of Maryland professor and author of "Whistleblowers:
Broken Lives and Organizational Power." Reprisals are almost certain,
he said. "Almost half of all whistle-blowers are fired, and of those,
half lose their homes, and [of] the ones who lose their homes, more
than half will lose their families as well."

Even Watkins might have eventually lost her job if Enron had not
"self-destructed," Alford said. It was too soon to tell: Many
companies turn their corporate challengers into corporate pariahs and
let them twist in the wind, then fire them after about two years --
long enough after the fact to make the termination not look like

"For every Sherron Watkins, there are hundreds of whistle-blowers who
never make even the back pages of newspapers, so they lack that
protection of visibility and they are gotten rid of, sometimes
legally, sometimes not. Then they spend the next 20 years of their
lives trying to figure out what happened to them," Alford said.

It's no wonder then that "corporate morality becomes doing what the
boss tells you to do," he added.

Most whistle-blowers are not as famous as Karen Silkwood, the worker
at a Kerr-McGee plutonium-production plant who died in a mysterious
car accident when she was gathering evidence of poor plant safety, or
Jeffrey Wigand, the Brown & Williamson Tobacco Corp. executive who
was fired for revealing that the company deliberately hid potentially
damaging research about smoking. Silkwood was the subject of a movie
by that name, and "The Insider" depicts Wigand's story.

But famous or not, the stories of most whistle-blowers are similar:
Not only are most fired, but they also find it virtually impossible
to find a comparable job.

As one whistle-blower who declined to be named described life after
being fired for questioning the firm's financial transactions: "There
is a pervasive feeling that a whistle-blower is someone who has
betrayed the employer he worked for. He's labeled as idiosyncratic,
disgruntled and considered an outcast, someone who's too much of a
risk to hire." It took a year for this employee to find another job,
and it pays much less than the old one.

It's not just the fear of reprisal that makes it difficult for some
employees to speak out: It's also the corporate culture, which in
some firms takes on the intimacy of a second family -- in some cases, the
only family. Employees can "become so identified with the
organization and its practices that it's hard to see something wrong,
and someone who reports something questionable is going to
look like someone who doesn't care about the family," said Suzanne
Masterson, a professor of management at the University of
Cincinnati College of Business Administration. This was especially
the case with so many dot-coms, where camaraderie was the
key to the culture, Masterson said.

It's important to notice that Watkins, Mintz and Olofson pointed out
their companies' problems with what seems, from the outside, a
decent amount of discretion and consideration for the firm. They
didn't steal documents and run to the local newspaper. They had
standing in their organization and had expertise in the matters they
were questioning. They took their concerns quietly to the top guy
-- and nothing happened. Watkins got the corporate equivalent of a
pat on the head, Mintz's concerns were basically overlooked, and
Olofson got the boot. Given that, it seems legitimate to wonder
whether corporations can tolerate any challenge to their ways of
doing business, no matter how genteel an employee is in making that

There's also an employee's financial stake in the firm. The growing
use of stock options and company stock in retirement funds has
meant that many workers are heavily invested in their firm. And
employees, like other investors, may think twice if their actions
could  lead to a dramatic drop in the stock's value. Then they're likely to
suffer further retribution from colleagues seeing their net worth
sink - or in Enron's case turn to nothing.

Joseph L. Badaracco Jr., a professor at Harvard Business School,
theorizes that's one reason more people did not come forward at
Enron. By keeping quiet and trying to correct what problems they knew
existed, they hoped to turn things around, "earn some real
profits and go back to being a real company," Badaracco said. But "if
they stopped playing the game, the house of cards falls apart."

So why did someone like Watkins come forward? "One possibility," said
Badaracco, "is she just had a different threshold, and some
things [other employees] thought were sleazy but necessary, she
thought were too sleazy."

But, he added, she might have had other motives. "Often in these
cases, especially when the pressure is on, people stop liking each
other, so there could have been a personal matter. The other
possibility is that since she worked there for a couple years this
was a way of covering herself -- protecting herself, settling scores and
doing what she thinks is right."

In fact, some Enron employees have pointed to Watkins's anonymous
letter to suggest she did have a self-serving motive. "My eight
years of Enron work history will be worth nothing on my resume, the
business world will consider the past successes as nothing but
an elaborate accounting hoax," it read in part.

Because Watkins never took her concerns public -- they were disclosed
only after congressional investigators started looking into
the company after Enron filed for bankruptcy protection -- many
people also suggest she doesn't deserve the whistle-blower label that
others have given her.

"She spoke up, but I don't see any evidence that she resisted or went
beyond in some way to demand a remedy," Glazer said.

Alford disagrees, saying "she put herself at very substantial risk."

Some companies are more receptive than others to whistle-blowers, but
often it's hard to tell how a company is going to react to
allegations. A growing number have set up toll-free hot lines or set
up special ombudsman or inspector-general offices to probe
complaints voiced by employees. In fact, Pinkerton and Network Inc.
report that in addition to receiving more calls from employees,
they are also getting more calls from companies that want to set up
programs to make it easier for employees to voice their

But hot lines and special offices don't guarantee that allegations
will be taken seriously, said lawyer Phillips. "It varies from
corporation to corporation, and you never know if this is not going
to wind up hurting your career within the company and you might
become isolated."

At Enron, all the signs were that the company cared about corporate
ethics. In July 2000 the firm issued a code of ethics and Lay
sent a memo ordering all employees to read the 61-page booklet and
sign a certificate of compliance.

Additionally, the company liked to stress its commitment to "RICE" --
respect, integrity, communication and excellence. The words
were printed on T-shirts, on paperweights and on signs posted around
the company.

Yet there was another side to Enron's culture, as discussed in an
August 2001 report by the energy consulting firm Global Change
Associates: Enron was a competitive, intense and high-stress
workplace. "If an individual or individuals fail to add to the
corporate coffers they are quickly deemed to [be] unnecessary
'overhead' and are expendable. . . . When Enron no longer needs
someone, they are removed and replaced," the report said.

So far, Watkins and Mintz have escaped that fate. And we don't know
what will happen to employees who become inspired by their example.
Their experience will ultimately reveal whether this is a new era for

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