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Chairmen Who Built Enron, Global Crossing Plead Ignorance

Oct 5, 2002 | AP

Two of the largest corporate collapses have at least one thing in common: company chairmen who took their creations to great heights, reaped millions from stock sales and said they knew nothing of problems until it was too late.

Kenneth Lay's defense after Enron Corp.'s spectacular downfall was that he was largely uninformed of how the energy-trading company's finances worked.

In congressional testimony this week, Global Crossing Ltd. Chairman Gary Winnick could not remember receiving a single warning about potential problems at his fiber-optic company, although senior executives were sounding alarms with increasing frequency in the spring of 2001.

Enron filed for bankruptcy protection in December. Global Crossing followed suit a month later.

Critics have challenged the veracity of the claims of ignorance, which also have raised questions about how involved chairmen should be — especially when they are so closely tied to their companies' rise. Winnick founded Global Crossing, while Lay transformed Enron from a small natural gas company into an energy giant.

"Regardless of size, you should expect chairmen to be aware of major factors affecting the business," said Robert Webb, professor of finance at the University of Virginia's McIntire School of Business.

There are, however, no well-established rules about what chairmen are supposed to know, said Lawrence Mitchell, a George Washington University law professor. Chairmen who are not also chief executive are not necessarily kept abreast of day-to-day business, but instead focus on the big picture. At many corporations, the positions are combined.

Some chairmen are so closely linked to their companies that pleading ignorance would not be credible. The government's antitrust case against Microsoft, for example, revealed that Chairman Bill Gates was intimately involved in the company's affairs, Webb said.

David Skeel Jr., a University of Pennsylvania law professor and expert in corporate bankruptcy, said executives who have asserted they did not know what was happening in the recent round of corporate failures were employing a potentially effective legal strategy.

"Strategic ignorance, you might call it," Skeel said. "If you can argue you didn't know what was going on, it's hard to mount a securities fraud case against you."

Rep. Billy Tauzin, chairman of the House Energy and Commerce Committee, which is investigating Global Crossing, called Winnick's testimony something else — hard to believe.

"Impending corporate doom. Billion-dollar shortfalls. As many times as he said he didn't know that, I can't believe he didn't know that," Tauzin said.

Lay served as both chairman and CEO, then promoted Jeffrey Skilling to chief executive last year. It was in that period that many of Enron's off-the-books partnerships were formed and used to hide some $1 billion in debt. Skilling also has testified he could not recall being involved in approving transactions related to the partnerships.

Lay resumed running Enron when Skilling abruptly quit in August. He stepped down as chairman and CEO in January.

Lay, who asserted his constitutional protection against self-incrimination when he was summoned to testify before Congress, told an internal investigation he knew little about how Enron's finances worked and the forces behind its downfall.

But William C. Powers, dean of the University of Texas Law School, told lawmakers in February that his investigation found "virtually everyone from the board of directors down" understood Enron used its partnerships to "offset its investment losses with its own stock."

In the Global Crossing case, documents and the testimony of other former and current Global Crossing employees contradict Winnick's assertion that he had no hint of trouble despite daily conversations with CEO Thomas Casey, said Rep. James Greenwood, R-Pa., chairman of the House panel at the forefront of Congress' probe of corporate failures.

"There was a lot of dog-ate-my-homework sort of stuff," Greenwood said.

Before the bankruptcy filing, Winnick had sold $734 million in Global Crossing stock, including 10 million shares worth $123 million that he sold less than two weeks before he said he first heard the company could be in financial trouble.

Tauzin pointed to the May stock sale as the principal reason Winnick repeatedly said he didn't recall earlier warnings. If he acknowledged having been told of problems before selling his stock, he would have opened himself to allegations of insider trading, Tauzin said.

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