Enron Internet Messages Indicate Insiders Knew Early on of Financial Fraud

Sacramento– Legislation introduced today would hold executives, like former Enron CEO Ken Lay, criminally liable for financial fraud that they knew about but did not report. SB 1452 (Escutia), sponsored by the Foundation for Taxpayer and Consumer Rights (FTCR), also adds new protections for employees who blow the whistle on companies that break the law.

In support of SB 1452, corporate whistleblowers provided testimony and FTCR presented new evidence of insiders’ knowledge of Enron‘s imminent collapse to the California Senate Public Safety Committee.

At the committee hearing, FTCR unveiled recently uncovered internet postings from apparent Enron insiders warning of illegal activity at Enron as much as three years in advance of the company’s collapse. One such posting from April 12, 2001 forewarned:

The first sign of trouble will be an earnings shortfall followed by more warnings. Criminal charges will be brought against [Enron] executives for their misdeeds. (Read other Enron postings.)

“We can only prevent the next Enron by holding individuals within corporations criminally liable for their acts. If SB 1452 were current law Ken Lay and other Enron executives would be under indictment today,” said Doug Heller, senior consumer advocate with FTCR. “This proposal ensures that the public interest is placed above corporate interests. SB 1452 will punish executives when they knowingly keep pensioners, shareholders and their employees in the dark about financial fraud.”

SB 1452 will:

• Provide new protections to whistleblowers and subject employers to civil penalties for retaliating against employees who report or who refuse to participate in illegal activity.
  

• Establish a Whistleblower Hotline to provide employees with confidential access to law enforcement authorities.
  

• Impose fines and jail time on individuals that cover up accounting fraud.
  

• Impose up to $1 million fine on corporations that withhold information about financial fraud.

Whistleblowers testify in support of new protections for “moral” employees

Whistleblowers testifying in support of the legislation pressed for the creation of a safe-haven for employees who wish to come forward with information about company wrongdoing. They also spoke of the need for stronger sanctions against employers who retaliate against employees who expose company wrongdoing.

“It is the nature of corporations to suppress voices of dissent,” said Dr. Linda Peeno, a former medical reviewer for two HMOs. “It is up to society to create the conditions that enable moral individuals to speak.” Dr. Peeno is the subject of “Damaged Care,” starring Laura Dern, a soon-to-be-released Showtime movie based on her experience as an HMO medical reviewer who spoke up about problems in the system.

Matthew Zipoli, who was fired from his jobs as a security officer at Lawrence Livermore National Laboratory after raising concerns about the security of the facility’s nuclear materials, also testified. “Whistleblowers can look forward to retaliation from their employers: a hostile work environment, and, ultimately, termination. Retaliation is always harsh, cold, and calculated. It is done intentionally to send a message to all employees who only wish to safeguard the public,” said Zipoli.

Penalties Against White Collar Criminals Modeled After 1990 Law

The provisions in SB 1452 that punish executives for knowingly withholding information about financial fraud is modeled after California Penal Code Section 387, the California Corporate Criminal Liability Act. That law passed by the Legislature in 1990 holds managers accountable and subject to imprisonment if they do not disclose information about workplace safety violations. SB 1452 would apply the concept to instances of corporate financial fraud.

“The Enron/Andersen scandal — along with countless other corporate crimes — could have been avoided had employees of the companies come forward with knowledge of company wrongdoing. But current law fails to adequately protect whistleblowers from retaliation, and fails to impose sanctions on the corporate leaders who know of financial fraud, but do not disclose it to their shareholders or law enforcement,” said Heller.

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