EnronBankruptcy

December 2, 2001

Arthur AndersenCourt Case

Winter/Spring 2002

WorldCom Restatement June 25, 2002;

BankruptcyJuly 21, 2002

Sarbanes-Oxley ActSigned

July 30, 2002

SECRegulations

Stock ExchangeGuidance

Public outrage grows, governance credibility falls

FIGURE 2.1GOVERNANCE REFORM TIMELINE

$ 90.00

$ 80.00

$ 70.00

$ 60.00

$ 50.00

$ 40.00

$ 30.00

$ 20.00

$ 10.00

$ 0.00

Enron Corp. (last price N/A)

US

Do

llar

s

FIGURE 2.2ENRON STOCK CHART, WEEKLY PRICES, 1997–2002

$132Revolving

Credit

$240 Loan

$11.4Loan*

$11.4$0.125

Sources

Bank $251.4

Non-cash 132.0

Investors 0.1

BARCLAYSBANKPLC

KOPPER & DODSON’s Company

DODSONCompanies

ENRON

JEDI

CHEWCO

FIGURE 2.3CHEWCO FINANCING, IN MILLIONS

SPE SCHEME PURPOSE IMPACT

Chewco/JEDI Syndicated investment Off balance sheet liabilities hidden ($628 million)Revenues recognized earlyProfits on own shares

LJM Provided market for assets

Artificial profitsOff balance sheet liabilities hiddenEquity overstated ($1.2 billion)

LJM1/Rhythms Investment “hedge” Unrecognized losses ($508 million)

LJM2/Raptors Investment “hedge” Unrecognized losses ($544 million)

TABLE 2.1ENRON’S KEY SPECIAL PURPOSE ENTITIES (SPEs)

INVESTMENTRETURN,IN MILLIONS

OTHER,IN MILLIONS

A. Fastow $25,000 $ 4.5 in 2 mo. $30 + stock options

M. Kopper 125,000 10.0 incl. Dodson $2 in fees

B. Glisan 5,800 1.0

K. Mordaunt 5,800 1.0

TABLE 2.2PAYMENTS TO FASTOW & HELPERS

BLEW TO ACTION SUBSEQUENTLY

Cliff Baxter, Vice Chair

Lay None Exercised $32 million in stock options, just agreed totestify to Congress, found shot dead in his car—an apparent suicide—on Jan. 25, 2002

McMahon, Treasurer Fastow None Reassigned, later returnedas CEO

Kaminski, Risk Mgr. Fastow None Continued

Sherron Watkins Lay None Discussed with Skilling and asked Vinson & Elkins to review

TABLE 2.3ENRON WHISTLE-BLOWERS

Lou Pai Chairman, Enron Xcelerator $353.7 million

Ken Lay Chairman 101.3

Rebecca Mark-Jusbasche Director 79.5

Ken Harrison Director, Portland General Electrics 75.2

Kenneth Rice Chairman, Enron Broadband 72.8

Jeffrey Skilling Director (former CEO) 66.9

Mark Frevert Vice Chairman 50.3

Stanley Horton Global Chairman 45.5

Joseph Sutton Vice Chairman 40.1

J. Clifford Baxter Vice Chairman 35.2

Joseph Hirco CEO, Enron Broadband 35.2

Andrew Fastow Chief Financial Officer 30.5

SOURCE: © 2002 The Washington Post. Reprinted with permission.

TABLE 2.4ENRON STOCK PROCEEDS, OCTOBER 1998 TO NOVEMBER 2001, OVER $30 MILLION

FIGURE 2.4ENRON’S GOVERNANCE AND CONTROL STRUCTUREWAS SHORT-CIRCUITED

Outside Law Firm

SPEs

CEO: Lay, SkillingCFO: FastowCAO: CauseyCRO: BuyOthers: Kopper, McMahon, Glisan

Watkins, Kaminsky

MANAGEMENT

BOARDKen Lay: Chair; Co-Chair ZZZCommittees: Audit and Compliance

Compensation, Finance,Nominating

Internal Audit … AA

Company PoliciesCode of Conduct

Consultant: Arthur Andersen

Whistle-blowers

AUDITORArthur Andersen

MissingGuidance

SuspendedGuidance

MissingCompliance

LEGEND

FinancialReports

TABLE 2.5ENRON’S ACCOMPLICE BANKS’ LAWSUIT SETTLEMENTS

$ COMMENT

Merrill Lynch 80m March 2003 Fine imposed by the SEC.Four of the Bank’s executives were found guilty of fraud and conspiracy, facing sentences of up to fifteen years in prison(Daniel Bayly, Robert Furst, William Fuhs & James Brown).

JPMorgan Chase 2.2bn

135m

August 2005. First Enron-related US Bank settlement. The bank denied wrongdoing.

August 2003. Fine imposed by the SEC. JPMorgan’s Q2/Q3 profits were $1.83bn.

Citigroup 1.7bn

120m

June 2005. Citigroup did not admit liability, and said money already set aside for legal costs would cover the payment.

August 2003. Fine imposed by the SEC. Citigroup’s Q2/Q3 profits were $4.3bn.

Canadian Imperial Bankof Commerce

2.8bn

80m

June 2005. More than annual profit yr 2005.

December 2003. Fine imposed by the SEC.Two CIBC executives also will pay fines totaling $600,000.

Toronto Dominion Bank 130m August 2005

Royal Bank of Canada 25m August 2005

Royal Bank of Scotland 42m August 2005

Sources: SEC files, newspaper articles and Enron’s website at http://www.enron.com for press releases on Megaclaims settlements.

TABLE 2.6ENRON KEY EXECUTIVE INDICTMENTS

INDICTED BY FOR PLEA/ COOPERATE RESULT

Ken Lay, Chair,Chair and CEO

Jul 2004, 2 trials:

1 jury, 1 judge

Conspiracy, fraud & false statements

Not guilty

Not guilty

Guilty in both trials, but died

before sentencing, so

verdicts vacated

Jeffrey Skilling, CEO Feb 2004 Conspiracy, fraud, false statements, insider trading

Not guilty 24 yr, 4 month sentence

Restitution $45 million

Andrew Fastow, CFO Jan 2004 Securities fraud Plea agreement (guilty) 10 yr sentence, later reduced to 6 yrs, forfeit $23.8 mil

Lea Fastow,Assistant Treasurer

May 2004 Tax fraud Plea agreement (guilty) 1yr sentence

Richard Causey, CAO Dec 2005 Securities fraud Plea agreement (guilty) 7yr sentence Forfeit $1.25 million

Michael Kopper Aug 2002 Fraud andmoney laundering

Plea agreement (guilty) 37 month sentence

Forfeit $12 million

Mark KoenigInvestor Relations

Aug 2004 Securities fraud Plea agreement (guilty) 18 month sentence Forfeit $1.49 million

Ben Glisan, Treasurer Dec 2002Sep 2003

FraudFraud

Denied wrongdoing,

later 5yr sentence, later brought

favors, forfeit $625,000.

Kenneth Rice, CEO Broadband Services

Apr 2005 Securities fraud Plea agreement (guilty) 10yr sentence Forfeit $29.4 million

Kevin Hannon Sep 2005 Securities fraud Guilty 5yr sentence Forfeit $250,000

Timothy Despain Assistant Treasurer

Apr 2004 Securities fraud Plea agreement (guilty) 5yr sentence, released on $100,000 bail

Enron Board of Directors (18 members)

Jan 2005 Breach of Fiduciary Duty

Settlement $168 million; $155 million covered by insurance

Source: SEC Files, newspaper articles, see also http://www.chron.com/news/specials/enron/ = Cooperates with prosecutors

2000 1999 1998

Summary Income Statement (millions)Revenues $101,789 $40,112 $31,260Operating income 1,953 802 1,378IBIT 2,482 1,995 1,582Net Income before Cumulative Accounting Changes 979 1,024 703Net Income 979 893 703EPS (in dollars) - basic 1.22 1.17 1.07

- diluted 1.12 1.10 1.01

Detail of IBIT (millions)Transport & distribution

Trans. Services $391 $380 $351Portland General 341 305 286

Wholesale Services 2,260 1,317 968Retail Energy Services 165 (68) (119)Broadband Services (60)Exploration & prod. - 65 128Corporate and other (615) (4) (32)IBIT 2,482 1,995 1,582

Summary Balance Sheet (billions)Current assets $30.4 $7.3Investments, other 23.4 15.4Property, plant, equip, net 11.7 10.7Total Assets 65.5 33.4

Current liabilities 28.4 6.8Long-term Debt 8.6 7.2Deferred credits and other 13.8 6.5Shareholders’ Equity 11.5 9.6

Total Liabilities & Shareholders’ Equity 65.5 33.4

TABLE 2.7SELECTED ENRON FINANCIAL STATEMENT DETAILS

ANNOUNCED SOURCE OF CHANGE

1994The Dey Report, “Where were the Directors?,” Toronto Stock Exchange To review corporate governance and make recommendations for best practice.

1999 Five Years to the Dey Report on Corporate Governance, Toronto Stock Exchange and The Institute of Corporate Directors To survey and analyze governance procedures at TSE companies.

May 2000 The Combined Code: Principles of Good Governance and Principles of Best Practice Based on the Hempel (1998), the Cadbury (1992) and Greenbury Reports (1995), used by companies listed on the London Stock Exchange.

2000 Guidance for Directors on the Combined Code, The Turnbull Report. See Combined Code purpose.

Nov. 21, 2001 The Saucier Report, “Beyond Compliance: Building a Governance Culture,” Joint Committee on Corporate Governance, CICA/TSE To review the current state of corporate governance in Canada, compare Canadian and international best practices, and make recommendations for changes that will ensure Canadian corporate governance is among the best in the world.

Apr. 26, 2002 Toronto Stock Exchange (TSX) Guidelines Amended Revisions effective Dec.31, 2002 to adopt some Saucier Report recommendations.

Apr. 4, 2002 SEC Blue Ribbon Committee Discussions

2002 Various Business Roundtable—various statements

June 6, 2002 NYSE Corporate Governance Listing Requirements, Effective Aug. 2002, after SEC approval A review at the request of Harvey Pitt, SEC Chairman, to enhance the accountability, integrity, and transparency of companies listed on the NYSE.

June 28, 2002 SEC Order effective Aug, 14, 2002 CEO and CFO to certify 8-K, quarterly and annual financial reports.

July 9, 2002 President George Bush’s Proposals Speech Visit the text’s website for links to the organizations’ websites

TABLE 2.8KEY CHANGES IN GOVERNANCE GUIDELINES AND REGULATIONS

TABLE 2.9ORGANIZATION OF THE SARBANES-OXLEY ACT of 2002

SECTIONS TITLE

1, 2, 3 Short Title, Definitions, Table of Contents

101–109 I Public Company Oversight Board

201–209 II Auditor Independence

301–308301

III Corporate ResponsibilityPublic Company Audit Committees (including whistle-blower encouragement)Corporate Responsibility for Financial Statements (including CEO and CFO certification)

401–409404406

IV Enhanced Financial DisclosuresManagement Assessment of Internal ControlsCode of Ethics for Senior Financial Officers

501 V Analyst Conflicts of Interest

601–604 VI Commission Resources and Authority

701–705 VII Studies and Reports

801–807 VIII Corporate Criminal Fraud Accountability

901–906 IX White Collar Crime Penalty Enhancements

1001 X Corporate Tax Returns

1001–1007 XI Corporate Fraud and Accountability