Electric Utility Week

Copyright 2003 McGraw-Hill, Inc.

Monday, May 19, 2003
Report reveals massive Wittig deception as plaguing all aspects of Westar Energy

An internal probe of beleaguered Westar Energy depicts a runaway train of corruption fueled by
sweetheart financial deals and a mammoth disinformation campaign directed by its former
engineer, David Wittig. The May 15 report said ex-chief Wittig's "unjust enrichment" and
"fraud" include tricking directors into investments designed to benefit him and his cronies at
company expense, audibly shredding documents while subordinates were lectured about
protecting corporate records and launching secret investigations to intimidate perceived enemies.

The way "senior management, particularly Mr. Wittigexploited their authority for personal gain
increased over time as potential obstacles to their excesses were removed," it added.

Wittig and Douglas Lake, his former top lieutenant, centralized power in the company between
themselves, pushing aside board members and officers who might ask tough questions.

The two hired detectives to "conduct background investigations" on various individuals,

including former Westar Chairman John Hayes, Vice President Steve Kitchen and a reporter for
The Topeka Capital-Journal.

They also ordered exhaustive searches of phone records, trying to trace the source of information
leaks to state regulators and the media. The report said those activities apparently violated no
laws and never found the leak.

It also blamed key members of the Westar board for inaction, inattention and cozy relationships
with Wittig so pervasive that the birth of the investigation was tainted.

Rudimentary procedural safeguards did not exist and outside directors did not "effectively
exercise oversight responsibility." The probe found no evidence of accounting fraud that would
require restatement of already issued financial reports, a fact that new Westar President and CEO
James Haines stressed during an hour-long session with reporters.

He proclaimed the start of a healing process that will "begin to close a difficult chapter in the
recent history of Westar" and produce a "very bright" future for the Topeka, Kan.-based utility.

Prominent law firm Debevoise & Plimpton ran the $6.7-million probe, assisted by investment
consultants and forensic accountants from PricewaterhouseCoopers. The 368-page narrative, 246
exhibits and 12 pages describing remedial board actions are based on 450 boxes of documents,
contents of 22 computers and 200 interviews.
New, stunning details of terrible judgment at best and illegal conduct at worst leap from almost
every page despite years of controversy surrounding Westar.
For example, the federal grand jury probe which triggered the internal investigation now is
known to include Westar's planned merger with Public Service New Mexico, the company's sale
of ADT stock to Tyco, the company's investment in the Wing Group independent power
developer and Westar's internal audit function. The Internal Revenue Service has joined the U.S.
Attorney, the Securities and Exchange Commission and the Federal Energy Regulatory
Commission in probing Westar.

Wittig kept a grand jury probe of his personal finances secret for over a month before confiding
in a board member who was also a close friend. He formed the board special committee, called a
special meeting at which his employment agreement was revised, then "advised" the board of his
actions just before the meeting ended without discussion or a vote.

The board rectified the problem within days and made the investigation independent. Within
weeks, Wittig was gone. Investigators discovered that Westar-funded lawyers provided Wittig
personal services in connection with the grand jury probe, for which the company will seek
reimbursement.

Federal bank fraud and money laundering indictments, which forced Wittig's resignation, had
been depicted as involving only personal conduct. But the report reveals Westar links in his
dealings with co-defendant and Capital City Bank President Clinton Odell Weidner II. While
Wittig was working on the personal deal--at times writing letters on company stationery--he was
also negotiating with Weidner for a $20-million line of credit to finance participation by
company officers and directors in a proposed rights offering. The bank would have gotten
$50,000 plus standard interest even though its "actual risk would be negligible." The report also
said Wittig repeatedly misled the board about everything from construction of "extravagant" new
offices to a stock swap deal involving Guardian International, which he sold to the board as a
money-saving procedure.

In the latter case, he did not tell directors that he and his top lieutenant, Douglas Lake, would be
the only beneficiaries, that they planned for Westar to buy Guardian, which would push up that
stock's value, and that they would "double-dip" the dividends from both the Westar and Guardian
stock during the narrow window they had set for the deal to close.

"Mr. Wittig and Mr. Lake not only were aware of the valuable benefits they were
misappropriating at the Company's expense, it seems that they could barely contain their
excitement. (They) were observed in a hallway near the meeting room (where the deal was
approved) high-fiving in celebration," the report said.

It also said Wittig and Lake hid their personal stakes in QuVIS, "a struggling digital compression
venture that is well outside the Company's business plan," when inducing Westar to make an
investment that now is in jeopardy. Wittig had holdings valued at $3.175-million in QuVIS, of
which his wife was a director, and Lake had $125,000 at risk--details hidden from the board.
Wittig has since reported his investment as worthless.

As events unraveled, the report says computers with partly deleted memories turned up and top
company officials could clearly hear Wittig shredding documents as they sat in a meeting next
door being warned to safeguard records.

Investigators were hampered by lack of subpoena power, Wittig's refusal to cooperate after an
initial interview, and intense interference from former Westar auditor Arthur Andersen.

Snapshots from the probe report include:

-- Minutes of a 2002 board Human Relations Committee meeting were altered "to avoid
disclosure of Mr. Wittig's short-term incentive bonus in the proxy." No disclosure was made,
despite advice from the company's outside legal counsel.

-- Wittig induced Westar to invest $2-million in KMF, a hedge fund in which he had a $1-million
undisclosed personal stake. Westar lost over $1.8-million on the deal.

-- Wittig and former vice presidents Carl Koupal and Doug Lawrence developed a list of favored
political candidates, budgeted for individual contributions from other officers without their input,
requested the money, then collected and submitted it to candidates, including House Majority
Leader Tom Delay of Texas. Officers received a schedule of suggested donations.

While saying it is unclear if laws were broken, the report provides detailed evaluations of
possible violations of Federal Election Commission regulations and the potential civil or criminal
sanctions.

-- Four directors left the board in 11 months, all due to concerns about Wittig's management of
the company. Their departures had been publicly described as voluntary.

-- Wittig testified under oath at the KCC that director Jane Sadaka was unprepared for board
meetings and performed poorly. Investigators said just the opposite was true, that she was
"engaged during Board meetings" and took her "responsibilities seriously." They found "no
evidenceto support his testimony," and flatly described his sworn testimony about her attendance
record as "false." Attorneys familiar with the hearings said there could be a variety of
consequences, ranging from charges of perjury or making a false utterance, to a civil contempt
citation from the KCC if any party to the two-year-old KCC investigation of Westar chose to
pursue the issue of Wittig's testimony.

Sadaka also sought outside counsel, but was told that Cahill Gordon served in that role.
However, the report noted, the firm had been advising Wittig about how to rid the board of
Sadaka at the time she made the request.

-- Wittig and Lake became the sole members of the Executive Council by using a cost-cutting
plan to dump four senior officers while a fifth retired.
-- Abuse of company airplanes for personal travel was so rampant it became "a knowing
usurpation of corporate resources" which "jeopardized the accuracy of the Company's tax returns
and resulted in omissions in the compensation tables in the Company's proxy statements." The
company acquired four long-range jets, starting in 1996, to replace a turboprop generally limited
to 500-mile flights. The plane leases, which cost up to $2-million a year, were never presented to
or approved by the board.

Wittig rejected lease financing documents which would have limited personal plane use. The jets
ranged in price from $9-million to over $18-million.

Even Russ Meyer, a onetime Westar director who also was chairman of Cessna, the planes'
manufacturer, thought the lease of the fourth and most powerful jet was so "extravagant" that he
warned the Cessna representative handling the deal to "require a substantial deposit to protect
Cessna." As Meyer had feared, Westar board members who found out about this plane tried to
stop delivery. They failed and Westar lost $1.3-million selling a plane it rarely or never used.

Hayes made a reasonably good faith effort to control personal travel but after he retired, "the
Company's airplanes were subject to an ever increasing pattern of abuse. Mr. Wittig tacitly
eliminated any distinction that remained between business and personal travel." In fact, Wittig
and his family were vacationing in Europe using a company plane last July when an FBI agent
arrived at Westar headquarters to serve him with a grand jury subpoena about the loan deal with
Weidner.

"The use of corporate aircraft for personal travel not only violated the Internal Revenue code and
the federal proxy rules on disclosure of compensation, it violated the trust of the Company's
shareholders," the report says.

Westar's board has retained outside counsel to seek reimbursement with interest for personal use
of corporate aircraft over the last five years from Wittig, Lake, Hayes, former vice presidents
Carl Koupal and Richard Terrill and other employees and "current and former directors."

-- Lake violated his employment agreement by never establishing permanent residency in

Topeka. He used corporate planes to commute to his permanent home to New York, his vacation
home in Florida, and to various social events, often accompanied by his wife and/or in-laws.

-- Although Wittig and Lake kept their New York homes, they received relocation benefits based
on selling them. Together, they got $1.1-million in unauthorized cash payments.

-- Flight logs were repeatedly falsified over an eight-year period to cover up personal trips.

-- Three Westar executives flew to Florida for a New Year's vacation and ridiculed their hosts as
naive for taking the "business meeting" cover story for the trip seriously and preparing a
presentation.
-- Efforts to end abuses were thwarted by higher-ups. Arthur Andersen tried to raise the issue for
10 years and Wittig blocked an internal audit, something the report called "reflective of
consciousness of guilt."

-- A split-life insurance program started by Hayes gave participating executives "unheard of

rights" to cash in benefits "for staggering cash amounts." The plan apparently was developed to
pay big bonuses while dodging reporting requirements for the company or altering tax
obligations for individuals.

The Westar board said it will seek to void and recover millions of dollars in proceeds paid or
owed under that program and the Guardian International deal.

-- PNM was willing to pay up to $80-million to cover change of control benefits to top Westar
executives as part of the merger plan. The report said that money "presumably would have come
at the expense of consideration PNM otherwise was willing to pay in the merger."

-- Wittig used the same broker, Danielle DiMartino, for both personal and company transactions,
underscoring his "lack of judgment."

-- Ties binding Wittig and five board members to the University of Kansas "may have
diminished varied thought, searching scrutiny and critical analyses." Two days before the report
was issued, an investigative report on the Kansas City CBS affiliate, KCTV, used the Jayhawk
logo being knocked around by a Westar jet and pictures of Wittig and one director as fraternity
brothers at KU to highlight the situation.

However, Haines bristled when asked what Westar would do to repair collateral damage to KU,
saying he did not accept the premise of the question.

The report noted that under Wittig, company foundation contributions to KU totaled $579,000
during a three-year period when contributions to Kansas State University totaled just under
$306,000. The Jayhawks and Wildcats are spirited rivals in all aspects of Kansas life and both
schools are in Westar's service territory.

-- Wittig "investigated and discovered how Company employees voted their shares" at the 2000
and 2001 stockholder meetings, "an abuse of executive authority" that violated no laws or
company policies. Westar now has a policy precluding such "prying" in the future (EUW, 12
May, 2). Wittig reviewed 600 individual's votes in 2000 and 120 in 2001. Executives were
uncomfortable helping Wittig but feared balking because Wittig's goal was "to gauge loyalty."

-- Wittig's new executive office suite, which involved remodeling the top floor of an abandoned
department store at a cost of $288 a square foot, was far more grandiose than previously
supposed. The report said Wittig was "extravagant and insensitive" in pursuing such an "opulent"
project when the company was struggling financially, cutting costs and laying off workers.

Directors never saw the offices, and board meetings were moved to an airplane hangar to keep
them in the dark. Wittig claimed the move was made for the convenience of out-of-town
directors and to protect them from being "accosted by recently laid-off employees or the media."

Hayes had vetoed Wittig's plan as too ostentatious, but Wittig moved forward after Hayes'
retirement, hiding the costs in the capital budget and by using discretionary spending authority
intended to cover major repairs at power plants. Counting overhead, the total bill was $7.2-
million for 25,000 square feet, with costs ranging from a $29,000 custom-built television to
adding French silk cords to two lamps for $715.
Westar's board said it will pursue all the probe's recommendations, including recovering losses
from Wittig and Lake for the QuVIS investment; developing tighter controls on political
fundraising; improving public and governmental disclosure policies; improving corporate
governance, and protecting those making allegations of questionable auditing and accounting
practices. Other recommendations, such as a policy to avoid future airplane abuse and to protect
the confidentiality of employee stock votes, have already been adopted.