THE ANDERSEN DIVERSION
By Jim Rarey
July 8, 2002
Magicians are not the only ones who have mastered the art of
prestidigitation (sleight of hand). Anyone who has watched the con man at a
carnival work the shell game (a pea or marble under one of three shells)
knows it is almost impossible to watch both hands at the same time. The
trick is to get attention on the hand that is not manipulating the shells
while the other hand does the dirty work.
The "prosecution" of Arthur Andersen was a shell game to divert our
attention from Enron. While prosecutors and the congress concentrated on the
one-count indictment for paper shredding, Enron faded into the background.
The worst case scenario for Arthur Andersen, upon conviction, was a maximum
fine of $500,000 with no one going to jail. (You can’t put a corporation in
jail.) The fine would be inconsequential in the overall monetary exposure of
the company. The only other consequence of a conviction would be that the
SEC would bar the company from certifying financial statements for companies
listed on the stock exchange. That was not a concern either because it was
plain that Arthur Andersen was finished as a viable company. All the
perpetrators have to do is get a job with another firm and they are back in
business.
There is plenty of evidence to prosecute not only Andersen, but a number of
its clients, involved investment banks, brokerage firms, stock analysts and
rating services under the RICO statute as continuing criminal enterprises.
That possibility has never been raised by the media, Justice Department or
anyone in Congress and there is probably a good reason (from their interest)
that they haven’t.
To understand the huge ramifications of the Enron debacle, it is necessary
to clarify what the company did and who facilitated it. The media would have
us believe Enron created a number of "independent" partnerships (over 3,000)
to hide debt. The debt aspect is a red herring.
In order to set up the partnerships, Enron had three hurdles to overcome.
The first was SEC reporting and restrictions on companies involved in
securities transactions. This was accomplished when an Enron lobbyist
obtained a waiver from all the requirements of the 1940 Investment Company
Act from the SEC headed by Clinton appointee Arthur Levitt (now a senior
analyst at the Carlyle Group). The existence of the waiver was first
reported by Insight Magazine and discussed in this writer’s article,
"Enronitis a Communicable Disease."
The second hurdle was an accounting rule that an unrelated person or company
must own at least a laughable 3% of the "independent" partnership. It was
the task of the investment bankers to round up those investors. Some of the
banks put up the money themselves.
The accounting rules, usually described as Generally Accepted Accounting
Principles (GAAP), are promulgated by the Financial Accounting Standards
Board (FASB), a private organization.
In February of this year, the FASB finally got around to tightening up some
of the rules on the partnerships officially known as "Special Purpose
Entities." The FASB has been chaired by Edmund L. Jenkins for the last five
years up to his resignation at the end of his five-year term in June of this
year. Jenkins, prior to becoming chairman of the FASB had 38 years of
experience with an accounting firm including as the Managing Partner for its
Professional Standards Group. That firm was Arthur Andersen.
The third hurdle was an Enron policy that prohibited an Enron officer from
participating in the independent partnerships (which also would have been
prohibited by SEC rules had the waiver not been obtained). The Enron Board
of Directors waived its own conflict of interest rules to allow Enron’s
Chief Financial Officer (CFO) manage the partnerships.
The partnerships then proceeded to flood the securities market with stock
and bond offerings. Billions of dollars worth of securities were sold but
where the proceeds (money) went is still a mystery.
One of the first things an honest auditor will do is perform a cash
reconciliation. This is not just verifying bank reconciliations. It involves
analyzing all operations generating cash and expenses draining cash to
determine how much cash should be on hand. Obviously, this is not possible
if the auditor doesn’t see all the pieces of the company. It still is not
clear if Arthur Andersen had access to the books of the partnerships. That
may be academic now that Enron has sold its major (securities) trading
operations to UBS in Switzerland along with the records. Incredibly, at last
report, investigators and Congress have not even requested (much less
subpoenaed) bank records.
Could those billions of dollars have been laundered to other entities or
individuals? Who knows? But even those huge amounts may pale in comparison
to another possibility.
Catherine Austin Fitts, in her stint as a sub-cabinet level officer in the
Department of Housing and Urban Development (HUD), saw enough (before she
was drummed out for saving money) to suspect that billions of dollars may be
laundered out of HUD to unknown destinations. Fitts makes the point that
over $3 trillion is missing from just the Department of Defense (DOD) and
HUD over the last three years. Government auditors have thrown up their
hands in disgust saying the books of those agencies are unauditable. Both
agencies use the private auditing and consulting firm, Arthur Andersen.
Few have mentioned the possibility of such a huge embezzlement assuming
there is no mechanism that could accomplish that without detection. That is
not necessarily true. Although it would take the collusion of several highly
placed individuals in government, banks and other financial institutions,
there is one organization where that amount of money would be almost
indistinguishable in the daily volume handled, particularly if spread of a
period of time. That organization is SWIFT.
SWIFT is the acronym for a private organization set up by international
bankers, owned by the bankers and operated for the benefit of bankers. The
original name when it was first incorporated in Belgium in 1973 was the
"Society for Worldwide Interbank Funds Transfers." At some point in time the
name was changed to "Society for Worldwide Interbank Financial
Telecommunication." Evidently the original name was too descriptive of its
major function, wire transfers of money. On its website
(www.swift.com) in its "History" of the organization,
it falsely claims that the current name was its original name.
In 1976-77, as it began its international expansion, SWIFT contracted with
Burroughs Corporation, then headquartered in Detroit, to furnish computer
hardware and software for the network. Banking applications was one of
Burroughs’ strong product lines.
Without any advance indication, the Board of Directors abruptly fired the
CEO and Chairman of the Board and replaced him with C. Michael Blumenthal.
Blumenthal, a member of the Council on Foreign Relations and the Trilateral
Commission had recently resigned as Jimmy Carter’s Secretary of the
Treasury. Blumenthal was also a leader in the Council of the Americas
established by David Rockefeller in 1965.
The Council was and is the major non-governmental force pushing for the Free
Trade Area of the Americas (FTAA) usually described as an expansion of NAFTA
to encompass all of North and South America. Blumenthal regularly used
Burroughs’ corporate jet to attend the council meetings.
SWIFT now has a total of over 7,000 members and "sub-members." Eligible
members must buy a share of SWIFT and be a bank, securities broker-dealer or
a regulated investment management institution. Sub-members must be at least
50% owned by and under the management control of a member. Almost any
company involved in financial transactions can use the SWIFT network for a
fee if they are not a member or sub-member.
SWIFT claims to be a responsible organization as it is subject to oversight
by a commission comprising representatives from the central banks of the
G-10 countries, which are also members of SWIFT.
SWIFT tries to represent itself as just a telecommunications company
servicing the financial community. The words money and wire transfer are no
longer used. Money transfers are now called "messages. "
While SWIFT does not publish the dollar volume of traffic on its network, it
boasts its daily "message" traffic reached 8,683,922 on June 28, 2002. If
the average money transfer were only $1,000, that would translate into over
$8 trillion moved on that day. However, the figure is probably much lower,
perhaps $1 trillion since some of the "messages" may have really been only
messages and not money transfers.
At any rate, that missing $3 trillion would fit nicely into one week of
SWIFT transactions. That is not to say it happened, but it is a possibility.
Financial transactions can be traced for the most part unless they disappear
into the arcane banking world of the Middle East. That was proved when
tracking "terrorist" money merely by threatening banks with loss of the
privilege of doing business in the U.S. If that same threat were to be used
to follow the Enron money, we might learn something.
However, don’t hold your breath. When the entire U.S. Attorney’s office in
Houston recused themselves because of potential conflicts of interest, the
Justice Department appointed Leslie Caldwell to head a task force to
investigate (and prosecute?) the Enron case.
Caldwell comes out of the U.S. Attorney office in San Francisco, as did
current FBI Director Robert Meuller. Meuller had served a previous stint in
the Department of Justice where he was instrumental in containing the BCCI
investigation.
Caldwell was involved early on in the Arthur Andersen case. He had
negotiated a deal with Andersen that would have dismissed the indictment if
Andersen demonstrated it had learned its lesson from its previous "sins" on
Sunbeam, Waste Management and Enron and would mend its ways. The deal fell
through when former Andersen partner David Duncan made a deal with prosecutors.
It is frustrating to the serious investigators of these corporate scandals
to know the right questions, which are not being asked by the government
including the Congress. It appears all we will see is partisan finger
pointing and sham regulatory improvements.
Permission is granted to reproduce this article in its entirety.
The author is a free lance writer based in Romulus, Michigan. He is a former
newspaper editor and investigative reporter, a retired customs administrator
and accountant, and a student of history and the U.S. Constitution.
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