Gary Mulgrew of the NatWest Three Reports To Prison

Gary Mulgrew, one of the “NatWest 3,” the British former bankers who pleaded guilty in a U.S. court to a $20 million Enron Corp.-related fraud, became the first of the men to enter a federal prison.

Mulgrew, 46, entered the Federal Correctional Institution in Big Spring this afternoon, according to his lawyer, Reid Figel.

“He reported in accordance with the court order,” said Figel, a lawyer based in Washington, who declined to comment further. He said he went to the prison today with his client.

Last week, U.S. District Judge Ewing Werlein in Houston ordered co-defendant Giles Darby, 45, to surrender at the Allenwood federal prison in White Deer, Pa., on May 7, and David Bermingham, 45, to enter a federal prison facility in Lompoc, Calif., on May 9.

Today In Enron History

Today in Enron history, Arthur Anderson attorney Marie Mahoney appeared before the Supreme Court to argue that company lawyers committed no crime when they advised the employees that they should follow the document retention policy.

The argument was eventually successful and the Arthur Anderson convictions were unanimously overturned.  The convictions were mostly ceremonial as the company did not survive.

Shortseller Charged With Spreading False Rumors

The SEC charged Paul Berliner, a short-seller, with spreading false stories about Blackstone’s acquisition of Alliance Data Systems while selling ADS shares short, according to Financial Times.

According to the complaint, Mr Berliner on November 29 sent instant messages to traders at brokerage firms and hedge funds and elsewhere suggesting that Blackstone’s agreed deal to acquire ADS for $81.75 was being renegotiated at $70 a share. The rumours were picked up by the media and caused ADS’s shares to fall 17 per cent, according to the complaint, which did not identify the media outlets.

The case comes as the SEC faces growing pressure to investigate allegations that false rumours about Bear Stearns may have had contributed to its collapse last month.

Perhaps this new scrutiny comes too late for Enron – but maybe not for Jeff Skilling. If the dirty acts of these short sellers comes to light and are accepted for the crimes that they are, it might be possible to take a new look at the activities of the Wall Street Journal, Jim Chanos, Richard Grubman, and others who consistently talked down Enron stock during the summer of 2001. If the general opinion changes to allow the possibility Dr. Lay was correct when he accused the WSJ of being malicious with their stories, it might not be too late for Jeff Skilling to win his freedom.

Stories like this will continue. It’s just a matter of the public being willing to see the truth when it’s right in front of their faces.

NatWest Three To Report To Prison

Bloomberg reports that Giles Darby, David Bermingham and Gary Mulgrew, three British former bankers who pleaded guilty in a “$20 million Enron Corp.-related fraud” – were each ordered to surrender to prison during the next three weeks.

Those quotation marks are mine. It is not true that it was “Enron related” fraud – if there was any fraud, then Enron was the victim of the fraud. The allegation is that the NatWest Three conspired with Andy Fastow to skim millions from a deal with Enron.

Background on the alleged fraud

The deal with Enron which is in question involves Swap Sub – the hedging structure that was originally in place to protect Enron against a decline in Rhythms Net stock. Enron had an option to force Swap Sub to buy Enron’s investment in Rhythms for a predetermined amount (I believe it was $41 per share) in the year 2004.

In March 2000, Enron terminated the hedging arrangement with Swap Sub. As the hedge was being unwound, Andy Fastow offered to buy NatWest’s share of the investment (NatWest, Credit Suisse and Andy Fastow’s LJM were the investors.) Fastow created Southampton in order to buy the interest. After the NatWest interest was bought out, Andy Fastow then sold the bankers a personal put option on NatWest’s interest. One of the bankers exercised his option and made a profit of about 7 million dollars, which he split with the others.

Tom Kirkendall has a lavish and expansive NatWest Three archive for more details if you want them. One particulaly good synopsis of the events in question can be found here.

If there was a crime in all this, it wasn’t evidenced from their eventual plea agreement: one count of wire fraud. They were then sentenced to 37 months in prison.

The men will serve their time in different federal prisons, according to orders signed yesterday by U.S. District Judge Ewing Werlein in Houston. Gary Mulgrew was ordered to surrender to the facility in Big Spring, Texas, on April 30*; Giles Darby to the Allenwood facility in White Deer, Pennsylvania, on May 7; and David Bermingham to the prison in Lompoc, California, on May 9.

This is just absurd.

*Mr. Mulgrew will be housed in the same prison as Michael Kopper, Andy Fastow’s assistant and one of the people with whom the NatWest Three did the original Swap Sub deal.

Today In Enron History

Today in Enron history, nothing much happened as far as I can tell. It was a pretty ordinary day for the energy giant.

One can imagine that in any imagined year, say 2000, Jeff Skilling was busy talking to investors, taking phone calls, walking the halls to talk to employees. He might have worn black pants and a blue shirt, the cuffs rolled just above his wrists, where he wore a thick black watch.

One can imagine that he met with Causey and Fastow in the afternoon, just as Fastow returned from lunch with his wife. Five minutes late.

And one can imagine they discussed the various hedging structures, and international assets, which Jeff Skilling still did not like. There was some Azurix deal in Argentina which Skilling was lukewarm about, and it is possible that came up. But the meeting, one imagines, was short. Fastow returns to his office, and sends an email to his wife. Causey goes on to meet with a few of his people. Jeff Skilling returns to his office and shuts the door. He sits in his chair, and looks out over the downtown skyline, thinking about Argentina, and other faraway places. Better places. It’s not quite two o’clock and there is still an avalanche of work to do – calls to make, correspondence, investors, interviews, analysts…. But the office is uncharacteristically quiet, evoking inexplicable sadness, and he doesn’t feel like doing it yet. Instead, he looks out at the other buildings, the sun glaring against the windows, and he idly wonders what they’re working on in there.

After a few quiet moments, he snaps himself out of the reverie and picks up the phone. He makes his calls, meets with an interviewer, does what he’s expected to do. He has no way of knowing that today is one of the only days that will not come back to haunt him, that prosecutors of the future will not ask him, “Mr. Skilling, do you recall on April 22…”

On this day, Jeff Skilling is completely innocent.  Even the DOJ stipulates that.

Restating: The Career Killer

CFO Magazine reported on a new studyby four university professors which shows the unsurprising news that CFOs fired for erroneous financial reporting are finding it difficult to secure a comparable job — if they can get one at all.

The percentage of those who were able to find any job at all did not decline all that much: from 54 percent before Sarbox to 47 percent after. However, finding a comparable job — defined as CFO or better — became much more difficult: 37 percent were able to do that before Sarbox, but only 17 percent after. “Firms are less willing in the post-Sarbox period to hire a former CFO with a tarnished reputation,” the authors write. “This appears to be consistent with the intent of the legislation to increase executive accountability.”

The chances are even poorer of finding a comparable job at a public company, where reputations matter more. Penalties for violating Sarbox — criminal charges, restrictions from serving as an officer of a public firm, the loss of a CPA license — create blemishes that are hard to ignore.

This bothers me because it assumes that restatement is all the CFO’s fault. Sometimes it’s just not. And it also makes me giggle because I thought Certified Public Accountant was about the most placid, dependable, bland, middle-America, white-collar, respectable job one could possibly have.

I guess I was wrong.

So kids: Just say No to your guidence counselor who might suggest that you’d make a fine CPA some day. Instead, become a financial journalist. They never get called on all the crap they do.

Obligatory Enron Comment:

It’s ironic that at Enron, the job of CFO was somewhat divided between CFO Fastow and Chief Accounting Officer Rick Causey. Though I don’t know of either Jeff Skilling or Dr. Ken Lay talking about why this was so, it might be that Enron did not like all the power concentrated in one place (ie, Fastow). We can speculate that Fastow will not, in fact, be practicing any sort of accountancy when he gets out of prison.  However, I do not think his career is over at all. Mr. Fastow will undoubtedly spend a year at home with his family, and then if he still needs money (which is debateble), he’ll hit the lecture circuit. He’ll abashedly admit to his guilt, over and over again, and then advise companies how to not be an Enron. He will talk about his greed. He might even tear up on occasion, until that too becomes part of the routine. He’ll eventually go into business with a friend or relative, and he’ll make millions of dollars, and he’ll forever believe that since his debt has been paid, he’s working clean of heart, clean of conscience, clean of nose.

Introducing The Enron Cosmetics Line By Cara Ellison

Ladies, are you like me, constantly searching for good Enron cosmetics? Well, I finally took matters into my own hands for myself, and for you too. Introducing the Enron Cosmetics Line by Cara Ellison. Eye shadow and lipstick trios (with nail polish, blush, and skin care products on the way) will answer every woman’s requirement for makeup that adheres strictly to industry standards. Whether you’re busy cross-collateralizing your hedging structures or speaking to analysts and auditors, you can be sure you look your absolute best, particularly when the DOJ starts knocking on the door and the cameras come out.

The Enron Lipstick trio includes Fastow’s Shame, Kopper’s Krimson, and Nigerian Barge. Fastow’s Shame is a deep scarlet color, perfect for those times when every word that comes out of your mouth is a big, fat lie. Kopper’s Krimson has a bit more pink than Fastow’s Shame. And Nigerian Barge is a rusty color that looks safe and neutral but will inevitably get you in more trouble than you can handle. Additionally, Dodson Gloss is a clear gloss that makes everything look perfectly legit.

 

 

The Enron eye shadow trios are beautifully crafted with today’s working woman in mind. The Wall Street Journal’s Purple Prose is a lovely lavender color that will mislead others into thinking you’re guilty of something of terrible. Fun for a rowdy Friday evening! Lou Pei’s Green With Envy is as subtle as you’d expect – a muted forest green with a touch of grey. It is the absolute ultimate in respectability. And Arthur Anderson’s Gray Area Accounting can be worn either light or dark…with the standards constantly changing, who’s to say what’s right for you?

Today In Enron History

Today in Enron history, in 2005, two former Merrill Lynch executives were sentenced in the so-called Nigerian Barge trial.

James A. Brown, former head of the brokerage’s asset lease group, was sentenced to three years and 10 months in prison and a year’s probation. Daniel H. Bayly, former head of investment banking for Merrill Lynch, was sentenced to 2 1/2 years’ incarceration and six months’ probation.

 

Also today in Enron history, in 2006, Jeff Skilling wrapped up his testimony during his trial for fraud, conspiracy, and insider trading.  The following is my post from April 21, 2006.

 

The 7.5 days former CEO Jeffrey Skilling spent on the stand in his fraud and conspiracy trial may well have been the longest of his life. 

“I’m exhausted. I’m drained,” the 52-year-old former corporate star said Thursday after answering hundreds of questions. “I’ve waited a long time to say something. Now it’s in the jury’s hands.”

For him at least.   His co-defendant, Enron founder Kenneth Lay, is slated to settle into the witness chair for several days starting Monday. Lay, who turned 64 last weekend, complimented Skilling’s efforts.

“He did great,” Lay said. When asked if he was prepared for his turn, Lay replied, “Oh, yeah. Ready.”

Both men hope to convince jurors that they aren’t liars and conspirators as alleged by federal prosecutors in the aftermath of one of the biggest corporate scandals in U.S. history.

The government contends Skilling and Lay repeatedly lied to investors and employees about Enron’s health when they knew their comments masked flailing business ventures and fudged financial statements.

The two defendants say no fraud occurred at Enron, and bad publicity and vanishing market confidence drove the company into bankruptcy protection in December 2001.

Skilling is charged with 28 criminal counts of fraud, conspiracy, insider trading and lying to auditors from 1999 through 2001. Lay faces six counts of fraud and conspiracy from the period after Skilling abruptly resigned from Enron in mid-August 2001 until the company failed.

During his lengthy testimony, Skilling repeatedly denied he lied to investors about Enron’s financial strength or approved accounting tricks to meet earnings targets and impress Wall Street in the years before the company spiraled into bankruptcy proceedings in December 2001.

The former-CEO acknowledged his anger at the government for pegging him as a liar and a crook, and often struggled to keep his temper in check when grilled by prosecutor Sean Berkowitz.

Skilling ended his testimony Thursday by denying that he may have cheated on his taxes.

Skilling calmly said he didn’t recall backdating a $10,000 gift check to an ex-girlfriend to avoid paying taxes on it in 1998, and he told jurors the Internal Revenue Service has repeatedly reviewed his tax returns and reported no problems.

“I paid my taxes,” he testified more than $66 million from 1997 through 2004.

Berkowitz raised the tax allegation on Thursday during his second pass at cross-examining Skilling. The issue stemmed from another the federal prosecutor first raised on Tuesday regarding Skilling’s investment in an ex-girlfriend’s online photo-sharing company, which did business with Enron.

Neither issue is related to charges against Skilling, but Berkowitz used them to challenge the ex-CEO’s honesty.

Skilling told jurors Tuesday he invested $60,000 in the company and didn’t inform Lay or Enron’s board in writing. He also told the Securities and Exchange Commission several years ago that the photo company had a $3,000 contract with Enron.

Berkowitz showed jurors he actually invested $180,000 in the company, and it did $450,000 in business with Enron.

On Thursday, Berkowitz asked about two $10,000 gift checks Skilling wrote to the same ex-girlfriend check No. 277 dated December 1997, and No. 276 dated March 1998. Berkowitz asked if Skilling actually gave both amounts to the woman in March 1998, but backdated one check to December to avoid paying taxes on a gift of $10,000 or more.

Skilling said he didn’t remember the checks, but insisted he paid all the taxes he owes.

Skilling had told jurors he dated the woman in 1997 and 1998 after he divorced his first wife. When Berkowitz pressed him Thursday on when the relationship ended, he said they remained friends and occasionally dated after that.

“What does this have to do with fraud at Enron Corporation? Just out of curiosity,” Skilling asked with a sliver of sarcasm.

Then the prosecutor addressed Enron’s code of ethics, which required approval of executives’ investments in companies that did business with Enron. Skilling acknowledged it “probably” applied in his situation particularly given the personal connection.

“You asked what this had to do with fraud at Enron,” Berkowitz said.

“OK, now I understand,” Skilling replied.

The prosecutor then asked if the ex-CEO expected jurors to “rely on your word here, sir?”

“That’s right,” Skilling said.

Eight other witnesses breezed through brief stints on the witness stand, including Skilling’s ex-wife, Sue Lowe. She said she and her current husband, a stockbroker, sold $14 million in Enron stock options in October 2000 without prompting from Skilling. She acquired the options as part of their 1997 divorce settlement, she said.

Skilling had denied advising his ex-wife to sell the options two months after the August 2000 collapse of Enron’s elaborate plan to unload poor international assets to a group of Middle Eastern investors. That same month, the company’s stock hit its all-time high of $90.

Lowe said she sold at that time because they were nervous about the market and wanted to transfer holdings to bonds. Under cross-examination, she said she didn’t know Enron’s stock was trading high when she ordered the sale.

Under questioning from Skilling lawyer Randy Oppenheimer, Lowe acknowledged that she had agreed to testify reluctantly, but confirmed that prosecutors never asked her about the sale.

Most of the eight other witnesses who testified Thursday were Skilling friends or colleagues who vouched for his honesty.

Enron Myth: Enron Executives Dumped Stock While Encouraging Employees To Buy

[This is a retro RTG post, originally blogged on April 18, 2006.]

On the morning of December 12, just ten days after Enron filed bankruptcy, the first congressional hearing into Enron’s collapse began.  Paul Kanjorski (D-PA) was one of the first to speak.  “I would like to learn more about the serious financial harm done to thousands of Enron employees,” he said.  He said there had been press reports that employees had been blocked from selling their shares in retirement plans as the company descended into bankruptcy.  Kanjorski said, “Those hard working Americans had to watch helplessly while executives could apparently sell their stock and avoid financial pain.”

Whether he really saw it in press reports or he just assumed it, Kanjorski began one of the most controversial and pattently untrue myths about Enron. 

This is the real story:

The retirement fund was changing administrators.  Every Enron employee knew this – they had been informed in August of that year that changes were coming.  On the night of October 22, 2001 an email was issued company-wide: “October 26 is fast approaching!” it said.  On that date, the corporate savings plan would switch administrators.  Employees had just four days to make changes to their retirement plans.  The lockdown, the email said, would stay in effect until November 20.  Whatever everyone had as of Friday would be what they owned for the month. 

It is true that they could not sell stock – but it had nothing to do with a declining stock price or mismanagement in the C-Suite.

This lockdown actually benefited stockholders.  During the descent into bankruptcy, the stock was rapidly falling. By the time November 20 rolled around, the merger with Dynegy (Enron’s chief competitor) had been announced and had increased from about $3 to just over $7.  When the chance came to sell, many bought.

As for the executives, they were exempt from the lockdown – yet Ken Lay bought Enron stock during that time.  [Jeff Skilling had already left the company at the time.]

The “lockout” was not a plot to cheat employees.  It was a bit of administrative maintenance – and that’s all it was.

Enron Bulletin: Enron Employees Are Not Broke

Let us be clear: Enron employees are not broke, have never been broke, and grossly mis-stated their earnings for Q4 2001.

Though most Enron employees did have a nervous couple of months after the bankruptcy, some 17,000 Enron employees reclaimed the full value of their Enron retirement plans. About $321 million of a $4.45 billion sale of Enron’s pipeline business was placed in an escrow account to fund the closeout of its pension plans. That doesn’t even include the seven billion that was recently disbursed at $6.79 per share of stock.

So to those who bemoan the fate of the employees: just shut up. They are not broke. They are not homeless. They are all quite comfy and enjoying the heck out of their notoriety.

Enron Lawyers Must Provide Records

From the New York Sun:

A federal judge in Texas is ordering lawyers seeking a record $695 million fee in a class-action securities lawsuit to submit records detailing the 247,000 hours they allegedly spent working on the case over the collapse of Enron Corp.

On Wednesday, Judge Melinda Harmon of Houston gave the plaintiffs’ attorneys two weeks to file “contemporaneous time or billing records reflecting which tasks were performed, when, and for how long.”

247,000 hours?

I’m with Judge Harmon on this. Prove it.

Today In Enron History

April 18, 2000 was a pivotal day regarding Raptors.  It was the day the SPE was approved by many executives, but notably not Jeff Skilling.   A document used as an exhibit for the prosecution during the trial shows that six executives signed the agreement – but the space next to Jeff Skilling’s name remained blank.  At trial, Skilling said he would have had no trouble at all signing the document but he never saw it.

April 18, 2005 the jury was seated for the Enron Broadband trial.  Five men from the fledgling division were accused of 170 counts of conspiracy, wire and securities fraud, insider trading and money laundering: Joe Hirko, former co-chief executive officer of EBS; Scott Yeager, former senior vice president of business development for EBS; Rex Shelby, former senior vice president of engineering and operations for EBS; Kevin Howard, former vice president of finance for EBS; and Michael Krautz, former senior accounting director for EBS.

During jury selection US District Court Judge Vanessa Gilmore told the potential jurors that the accused men defendants “want to know as the kids say, whether you’re going to be hating on them.”

Today In Enron History

April 17, 2001 was an important and deeply misunderstood day in Enron history.   It was the day Jeff Skilling called shortseller Richard Grubman an asshole on a public analyst call.

Highfields Capital analyst Richard Grubman joined a conference call at Enron and  asked, for the sixth consecutive quarter, for a balance sheet with the earnings statement.  For the sixth time, Jeff Skilling told him that at Enron, the balance sheet was not released with earnings statements (at trial, the reasons for this were covered at length; there was nothing illegal or untoward about it – there was a very deliberate business purpose for doing things the way Enron did.)   The following is a transcript of the challenged part of the call:

Grubman:  You’re the only financial institution that can’t produce a balance sheet or cash flow statement with their earnings.

Skilling:  You…you…you.   [One can imagine this is the point when Mark Palmer, VP of PR at Enron, handed Skilling a note, reminding him who he was dealing with.]   Well, uh…thank you very much.  We appreciate it.  Asshole.

At this point, everyone inside the Enron building was jumping up and down and high-fiving each other because their CEO had finally said something to this guy who had been talking down the stock for quite some time – and even the question was a sort of accusation.  Enron folks thought Skilling handled the call just fine.  Of course, it wasn’t as well received in the rest of the business world.  

It caused such a kerfluffle that it was even brought up at trial by Sean Berkowitz.  To which Skilling replied, “The now infamous ‘asshole’ quote was used as an example of arrogance or something.  It wasn’t meant that way.”

It was clearly not – and though Jeff was an executive who should have just rolled his eyes and passed the call to someone else, that wasn’t his style.  He got his hands dirty.  He talked to short sellers.  He tried to get people to see Enron for what it was.   As he said right after the verdict at his trial, some things work and some things don’t.  Calling Grubman an asshole, as a strategy for handling pests, didn’t.

But the comment was never as earthshattering as the revisionists would like to believe.   It did not signal some sort of meltdown.  It didn’t mean that Skilling feared the question or was trying to deflect Grubman.  Even Jeff Skilling is entitled to lose his temper once in a while.

 

 

 

Enron Is Still The Leader

Eqal, the company that produces the Lonley Girl 15 Show, has apparently borrowed heavily from the Enron logo.   The tilted E, on the heels to go go go remains one of the most recognizable logos of our age. 

Check it:

How To (Not) Avoid Another Enron

I have come across that title no less than four times in the past six days, usually followed by “or Bear Stearns.” Of course it bothers me a great deal because I do not believe that Enron should be avoided. In fact, I think it should be re-created. I think Jeff Skilling should get out of prison and create ENE2. He should buy up the tallest Houston skyscrapers and put giant tilted E’s on the tops of them. He should also buy a decommissioned battleship and trick it out in gold and diamonds, and dock it in the Houston Ship Channel with “We Will Rock You” pounding out at 162 decibels twenty-four hours a day. But that’s Phase Two.

There was only one thing to avoid at Enron (or Bear Stearns for that matter), and that is socking away all of your retirement dollars in the company retirement plan – and that is the employee’s responsibility, not the CEO’s. During Jeff Skilling’s sentencing, there were nine victims who chose to speak. They all railed against Skilling. One former employee, Dawn Powers Martin, said to the court, “Mr. Skilling has cheated me and my daughter of our retirement dreams. Now it’s his time to be robbed of his freedom to walk the earth as a free man.” She turned to Skilling and said, “While you dine on Chateaubriand and champagne, my daughter and I clip grocery coupons and eat leftovers.”

This last sentence has always bothered me because its so arrogant. Are there not thousands of American families who eat leftovers and clip coupons? But I’ll save that for another time. The point is, while she’s very angry at Skilling, I doubt she’s ever given a whit of consideration to the fact that she too could be snarfing down chateaubriand while others clipped coupons if she’d had any sense and diversified her portfolio.

I seriously doubt any of the former Enron employees want to hear this, but that doesn’t make it any less true.

Re: Bear Stearns. As above, so below. Especially after the collapse of Enron, why in the world did those employees average 80% of their investment portfolio on their own stock, and then hold on to the stock while it raced for the floor? With ENE as a reference of what not to do with your retirement, the Bear Stearns employees have no excuse. But they still have their company, thanks to bailouts – so I guess all is fair in love and Wall Street.

The collapse of Enron is not the fault of the employees, of course, but they are the ones who demand to be shielded from the consequence of their decisions. I really wonder if whereever they are now, they are holding a retirement plan that is stuffed to the gills with their own company’s stock. While no one individual can stop the collapse of a company due to unfavorable market conditions, every individual has the right and responsibility to protect his own interests. So don’t avoid another Enron – in fact, let’s work as a society to rebuild great, innovative companies such as Enron. But do avoid the amatuer’s mistake of believing any company is infallible.