Army secretary under fire

Appearing before a Senate committee, Tom White comes under withering attack from Democrats -- while Republicans leave him to his fate.

By Anthony York
Published July 19, 2002 11:46PM (EDT)

It was clear from the very beginning of Thursday's Senate Commerce Committee hearing that Democrats were going to treat Army secretary Tom White like the personification of corporate malfeasance. And White's dilemma seemed particularly tough: admit chicanery or admit incompetence. He either knew about and participated in schemes that critics say raided the budgets of several Western states or, as an executive in charge, was oblivious.

Instead, he tried to defend himself against both charges. But he did so alone before the committee and the cameras. The Republicans there offered him little assistance. And the Democrats were merciless.

It was clear long before White walked into that hearing room what kind of day it was going to be. The two-hour tuneup before White's appearance had the feeling of a show trial's opening act, with testimony from consumer advocates like Public Citizen president Joan Claybrook, who wasted little time before calling for White's resignation.

When White's testimony finally began, he faced particular abuse from Sens. Barbara Boxer, D-Calif., and Ron Wyden, D-Ore., whose states were affected heavily by the energy crisis of 1999-2001, and from the committee's chairman, Sen. Byron Dorgan, D-N.D.

But he at times made it pretty easy for them. "I am ashamed of what happened to that corporation and the damage that it has done to all of us," he said. He complained that he had more than 665,000 stock options that were now worthless -- not mentioning the more than $50 million he reportedly made in salary and benefits during his 11 years at Enron. Boxer said she was "appalled" that White would have the audacity to compare his plight to that of Enron employees whose life savings were decimated.

Boxer punctuated the day by releasing a letter addressed to White, claiming, "The cloud surrounding you has not been resolved. Indeed, it has grown darker." She then delivered the coup de grâce, which many have been expecting for some time: "I believe it is in the best interest of the country for you to step down as the secretary of the Army, as I believe today's hearing will spark more investigations and more distraction from your crucial duties."

Wyden and Boxer also called for the Securities and Exchange Commission to investigate possible insider trading by White. After becoming secretary of the Army in February 2001, leaving his job as vice chairman of Enron Energy Services, White delayed his sale of Enron stock. Eventually, between June and October 2001, White sold Enron stock worth more than $5 million. During that time, according to phone records he handed over to a House committee, White spoke to Enron officials a total of 77 times. He told the committee that neither the SEC nor the Federal Energy Regulatory Commission, which has an open investigation into the California energy crisis, has contacted him about his roll in the Enron debacle.

Boxer pointed to the fact that the SEC was investigating Martha Stewart for phone calls she had with ImClone CEO Sam Waksal just before she sold her stock and the share price tanked. Boxer said she was going to personally call SEC chairman Harvey Pitt after the hearing to demand he look into possible insider trading by White. On top of that, White confirmed to the panel that the Department of Defense is investigating claims that he twice used government planes for non-government business.

When it was all done, no one offered White an encouraging word, and the White House remained ominously silent.

Dorgan set the contentious tone of the hearing, telling White, "We take no pleasure in inviting you to come today, and I expect you take no pleasure in being here." The latter point appeared particularly true. "I think there's a substantial amount of evidence that there was manipulation of pricing in the California marketplace," Dorgan said. "Was the division of Enron that you headed involved in that? Were you an enabler?"

After Sen. John McCain, R-Ariz., meekly turned down his opportunity to question White, Wyden picked up where Dorgan left off. "I think what we are going to be looking at today is whether we're dealing with a textbook case of an administration insider faced with serious allegations of questionable conduct getting kid-glove treatment," Wyden said.

The shots continued, and got more personal. Sen. Max Cleland, D-Ga., took a different tack. As a former Vietnam veteran, Cleland targeted White's Army past, and his sense of shame, asking him how he reconciled distinguished service in the U.S. Army with 11 years as a top lieutenant in the evil Enron empire. "When I was in the military, especially in Vietnam as a young officer, [I learned] that in combat, officers eat last," Cleland said. "And yet, my observation ... [is that] when push came to shove and the stock prices began declining, that the top 28 officers at Enron cashed in stock worth about a billion dollars and that in the economic turmoil, the economic warfare that they faced, Enron officers ate first, which to me is very disconcerting.

"I wonder how you square that. I mean, you were in the Army for 23 years," Cleland said. "You had a certain sense of ethics. And then you were in Enron for 11 years."

All the while, White took his abuse in silence, sipping often from water glasses set before him as the lights bore down. When White finally got his chance to speak, he tried to distance himself from Enron's problems as much as possible. Wearing a dark blue pinstriped suit, he addressed the committee in a raspy alto voice soaked in defiance. He called Enron Energy Services "a very small start-up business" that was not involved in the corporate misdeeds of its parent corporation.

But Boxer and Wyden seemed intent on pinning their state's recent energy woes squarely on White. Boxer angrily pointed to graphs showing the direct relationship of Enron profits to California power prices, saying "California was used as a cash cow" by Enron and other power generators and traders.

But was White's division involved? White's defenders argue that he should not be implicated in price-gouging because his division of EES was involved in retail energy sales. Unlike the wholesale division, which profited greatly from price increases in energy sales, the retail division would lose money in such an equation. If the wholesale prices went up, EES would then have to buy energy for more, but sell it at the same fixed rate, potentially losing money along the way.

White himself repeated this line of reasoning Thursday, telling the committee, "The interests of EES were entirely different from those of Enron Wholesales Services. It always operated on a strictly arm's-length basis with Enron Wholesale that reflected its different business interests."

While the price spikes of wholesale power could have hurt EES, as White testified, those potential losses were offset by a windfall of new lucrative contracts EES signed in the middle of the power crisis, during the summer and fall of 2000. The energy crisis in the West set off a mild panic among retail consumers desperate for a stable and reliable source of energy. Customers who wanted off the energy price roller-coaster turned to companies like EES, who signed up scores of new customers for long-term deals. In these deals, signed in the heat of the energy crisis, EES was able to charge much higher rates to their new customers than what they charged to customers before the crisis.

Numbers provided by Dorgan illustrated how EES's retail division's profits soared during California's crisis. EES lost $119 million in 1998. In 2000, they turned a profit of $103 million, a two-year turnaround of $222 million. The crisis actually revived EES's sagging California business. With the wild swings in wholesale power prices, and a state law that prohibited utilities from entering into long-term contracts with customers, California companies turned to power providers like EES.

One of those was a 10-year deal EES inked with the Macerich Company, a large real estate trust, which cited the instability associated with the California crisis as its reason for signing the new contract with EES. "Our agreement with Enron allows us to manage the volatile energy costs associated with deregulating markets, such as California," said Arthur Coppola, president and CEO of the Macerich Company, when the deal was announced in November 2000.

Boxer pointed to Enron memos, leaked to Congress in May, that indicate EES employees were involved in hatching a plan to engage in "ricochet" trading. Boxer pointed to Enron memos, leaked to Congress in May, that indicate EES employees were allegedly involved in schemes to drive up wholesale prices. In ricochet trading, traders would move energy outside California, creating a shortage in the state and driving up the wholesale price. They then turned around and sold that same power back to California at an inflated price. Enron traders also engaged in a process called inc-ing (pronounced "inking"), another scheme to drive up the wholesale price of energy.

In a contentious back-and-forth, White denied any involvement in Enron's schemes to milk California ratepayers and utilities for profits.

Boxer: Let's talk about hiding profits...
White: No, I don't know anything.
Boxer: ... for California, and let's talk about hiding losses in the big picture. Did you know anything about that?
White: No.
Boxer: Did you know anything about inc-ing?
White: No.
Boxer: While you were -- while you were in charge of day-to-day operations, you never heard of the term "inc-ing"?
White: Never.
Boxer: And you never heard of the term "Fatboy"?
White: Never.
Boxer: And you never heard of the term "ricochet"?
White: Never.

But Boxer was unconvinced. "I believe, Secretary White, that there was a scheme to bilk our people, to make EES profits. I'll believe it forever. I don't agree with you. I don't think you're credible on the point. I don't think that what you did while we were under siege was right."

The quality of the exchanges devolved as the meeting wore on. Boxer complained that White's Enron pals, like EES executive Robert Hurt, whom White spoke to often between June and October 2000, were uncooperative with her staff. Hurt, she said, "refused to confirm or deny that they were really close friends, and their lawyers would not reveal whether they were close friends or not, wouldn't let us know."

White: Are you contending that Mr. Hurt is not a good friend of mine?

Boxer: No. I'm trying to wonder why a best friend would ...

White: Would you like him to call you this afternoon?

By the end of the day, it was unclear whether Hurt ever did. But you couldn't blame White for trying to find a friend in a time of need.

Anthony York

Anthony York is Salon's Washington correspondent.

MORE FROM Anthony York

Related Topics ------------------------------------------