Disclosure of Michael Kopper’s Interest in Chewco

I was reading Enron’s 1999 and 2000 10Ks, as one does, and found something interesting. I’m not sure if I already knew this or not, but check this out:

What you’re looking at is Enron’s disclosure of Michael Kopper’s interest in Chewco. While I don’t believe the issue of disclosure was one that came up at any trial, I do think it is interesting that so much was made of this in October 2001. This disclosure was made in 1999. If anyone had a serious problem with it, you’d think they’d have mentioned it earlier.

Today In Enron History

Saturday, October 27, 2001

Chuck Watson met with Ken Lay at Lay’s family home. The two business leaders began to discuss the nuts and bolts of a potential merger. Dynegy didn’t want Enron’s international unit — except it would take the London trading operation. Everything else would strictly be in North America.

The company’s name? Ken Lay proposed “Enron-Dynegy”. Watson flatly refused, stating that the name Enron had become poison. If the merger would happen, it would just be Dynegy, and Watson would run it while Ken Lay would be a board member. And as for management, only Greg Whalley was welcome at Dynegy.

As for price, the opening salvo was for Dynegy to buy Enron at current market price with no added value for shareholders.

This took Ken Lay aback. The stock closed at $15.04 on Friday – and had been at over $90. Ken Lay stated that the reason the stock was zooming downward was because of short sellers and the media. The value was there – it just wasn’t being reflected in the share price.

But even if Watson wouldn’t go for it, Ken Lay knew that this had to happen fast. The company was evaporating before his very eyes. The power dynamic had shifted so dramatically. Just months ago, Enron was the biggest, baddest company in Houston. Now it was asking smaller companies for favors.

Later that day, Rick Causey met with some Anderson accountants at his office. David Duncan, Tom Bauer, and Deb Cash were given a quick presentation on Chewco. Causey described the issue with Michael Kopper’s lover, an issue that had arisen with Barclay’s (the company’s investment looked like a loan; it wasn’t, but it looked like it) and the fact that distributions were sent to Andy Fastow’s wife. Maybe troubling, but was it legal? There was still no dramatic conclusion.

And the lawyers arrived. Two partners from Weil, Gotshal’s Dallas office were shown around the trading floor. The trading guys, who were known for aggression, were determined to survive even if the rest of the company collapsed. They were not going down without a fight. Mark Haedicke, lawyer for the trading division, was the main contact for the Weil, Gotshal attorneys. Finally the went into a conference room to meet with Jeff McMahon, Greg Whalley, and some of the trading team. Ideas were tossed around. They could borrow against assets. But all the international assets were under water. They could get a private equity fund to throw some money at the trading division. They could borrow against the pipelines.

The beautiful, sleek, perfect pipelines. The assets at Enron’s foundation, the assets that brought in hundreds of millions of dollars every year. The core of Enron. Maybe, to the outside world, some value was still locked in those.

Today In Enron History

Friday, October 26, 2001.

The stock opened at $16 and would close at $15.40 – a loss of only 5.81% of its value. Nothing to cheer about, certainly, but when compared to the losses every day of the week, it was one of the better days.

The morning was surreal. Overnight there had been a terror threat on the Enron building so when workers got to 1400 Smith Street, they found the surrounding avenues blocked off and police everywhere. Of course, it was a false alarm but it certainly was an external representation of how everyone was feeling inside. Like things were about to go boom.

Ben Glisan was at his desk early, researching Chewco. After the WSJ published a lurid exposé the previous day, it was essential to get a handle on the deal.

From 10 to 11, Ken Lay was on the phone with Deloitte and Touche. At noon he attended an Enron board meeting, in which Glisan gave a presentation on everything he knew about Chewco.

One of the executives present at the meeting, Rodney Faldyn, didn’t like the sound of Chewco. He went to see Rick Causey and told him he felt like there might be a problem with it.

A few hours later, Faldyn and Ryan Siurek called Tom Bauer at Arthur Andersen and asked for clarification about the three percent rule. Bauer explained that three percent of an off the books partnership had to come from an independent investor in order for the partnership to be valid and comply with accounting rules.

Faldyn believed then that Chewco did not meet that standard.

Chewco had been used to buy Calper’s interest in JEDI. JEDI spun off a lot of cash – there had never been any question about the JEDI deals. But if Chewco wasn’t independent, that meant that JEDI wasn’t either, and all the income reported on every income statement, every balance sheet, every bit of information that had exited the Enron building would have been wrong, all the way back to 1997.

Ben Glisan, Rick Causey, and Rodney Faldyn met to discuss Chewco. And thus Enron was confronted with the strangest question ever to face any company anywhere: How do federal accounting laws view homosexuality?

(I need to interrupt myself to say I feel really weird talking about about Kopper’s sexuality. You don’t hear me talking about anyone else’s lover – just Kopper’s – and it’s because he’s gay. It shouldn’t be any big deal. So though I’m talking about Kopper’s love life [a place I have no business being] please know I’m really only trying to explain what was happening. I’m not singling him out or anything like that. I’m not going to discuss the sex lives on any other Enron execs. You can take that to the bank.)

If Kopper’s lover had been his lawfully wedded spouse, the whole deal would have violated accounting rules because the capital would not have come from an independent party. But Kopper wasn’t married. In the eyes of the state of Texas and the US Government, he was a single man, and his “friend” could invest whatever the heck he wanted. But he was Kopper’s live in lover. So was his investment independent or not?

Ken Lay must have felt a lead weight in his chest when he picked up the phone to call the Fed chairman, Alan Greenspan. High-flying Enron needed help, and Ken Lay probably never thought he’d see the day. He told Greenspan that Enron was having problems with its trading partners and cash was drying up. He did not ask for a bailout. He would have no doubt taken one, but he didn’t ask for one. Greenspan said he would monitor the situation. Ken Lay then put in a few other calls to his well-placed Washington friends.

After the call, he had a meeting with James Derrick (general counsel) and Rick Causey. Rick told him that they were still looking at Chewco, they hadn’t drawn any conclusions, but it looked like there might be a very serious problem with it.

That night the Enron 401(k) plan was locked down. After months of friendly reminders, Enron employees could not touch their accounts until November.

Today In Enron History

October 25, 2001

The stock opened at $16.40. It would close at $16.35. Enron’s stock would never close higher than it opened again, not even on the day the Dynegy deal was announced, and the October 25 loss would be one of the smallest ones Enron would know from here on out.

Steve Bergstrom, president of Dynegy, was like most oil and gas execs in Houston: he knew everyone. One of his friends was Stan Horton, CEO of Enron Transportation Services, which was basically Enron’s pipelines. Horton called Bergstrom and asked him to meet for lunch, and added that he’d like Greg Walley and Mark Frevert who was CEO of Enron Wholesale, to join them.

Bergstrom had floated the idea of combining Enron’s European trading ops with Dynegy’s and since both Whalley and Frevert were coming from trading backgrounds, it looked to Bergstrom like maybe Enron was coming around to that idea in light of the crisis.

They met at the Plaza Club at One Shell Plaza. On the forty-ninth floor, it has an astonishing view of Houston (speaking from experience, especially at night). Whalley gave it to him straight: they wanted to discuss a merger. With the whole company. Not just European ops.

Bergstrom, taken aback, was certainly open the idea. He said he needed to talk to Ken Lay directly. Whalley said that was no problem. A few hours later, Ken Lay got in touch with CEO Chuck Watson. They made an appointment to meet on Saturday at Ken Lay’s home.

Meanwhile, Enron had announced its plan to draw down its $3 billion in bank lines. The WSJ was all over that. They called Mark Palmer and during that conversation casually mentioned Chewco — what was that? Palmer said he had no idea.

Rebecca Smith and John Emshwiller had found the name in an LJM private placement document. Since Enron was in the throes of a crisis, they knew that they could get their names out there if they found a new controversy so they were attempting to find an angle nobody else had found yet. Chewco, it turned out, was that angle.

The article reads in part:

While Enron disclosed its Fastow-related transactions in SEC filings, a computerized search of the SEC’s database of public filings produced no reference to this other employee-related entity known as Chewco.

Chewco was established in 1997 “with approximately $400 million in capital commitments” to buy an interest in Enron assets, according to one of the partnerships documents. The document didn’t further specify what assets were purchased, and it didn’t disclose the financial impact of the transactions for either Chewco or Enron. Chewco was being run by Michael Kopper, a managing director in Enron’s Global Equity Markets Group, according to the document.

Enron, which has maintained that its complex financial transactions with employee-related entities were legal and properly disclosed, didn’t have any comment regarding its dealings with Chewco.

Mr. Kopper, who Enron says left the company this year to focus on helping to run the Fastow-related partnerships, didn’t return phone calls. A person at his office in Houston Thursday said Mr. Kopper was traveling. In response to questions about Chewco, an Enron spokesman would say only that “Michael Kopper was never an executive officer of Enron.” Mr. Fastow repeatedly has declined interview requests. He severed his relationships with the partnerships in July.

This statement is an apparent reference to SEC disclosure regulations regarding related-party transactions. Under SEC rule S-K, a company has to report any transaction that exceeds $60,000 and involves “any director or executive officer.” By contrast, Mr. Fastow, as CFO, would have fallen into that category, but Mr. Kopper, as managing director of a business unit, presumably wouldn’t have.

However, reporting guidance issued by the Financial Accounting Standards Board seems to have a broader definition, one that might include Mr. Kopper. According to FAS Statement 57, a related-party transaction involves a “material” piece of business between the company and a member of management. The statement defines management as directors, top officers, vice presidents in charge of major business units and “other persons who perform similar policy-making functions. Persons without formal titles may also be members of management.”

All that stuff about Michael Kopper is a transparent effort to cause trouble. Classic muckraking.

Inside Enron, Mark Palmer was trying to get some answers about Chewco so he could talk to Smith and Emshwiller about it. He wasn’t able to get good answers so he called a meeting with McMahon, Greg Whalley and a few others. Ken Lay got pulled in and basically everyone tried to cobble together what they knew about Chewco. Jeff McMahon mentioned that an issue was Michael Kopper’s partner was chief investor in the fund.

Ken Lay was confused. “He has another partner in this?”

“Um.. No,” McMahon said. “His.. lover. Michael Kopper’s gay lover.”

Ken Lay finally lost his composure. “What the fuck is happening here!?” he yelled.

The pressure Jeff McMahon was under during this time must have been otherworldly. He was working nonstop to keep the company afloat. Drawing down the bank lines was slated for that day, and the New York bankers weren’t happy about it. No bank had thought that Enron would draw down over $3 billion in one giant gulp. They didn’t want to send it. McMahon was a bulldog. “Send it,” he said.

“But … but.”

“Send it.”

Meanwhile, Andy Fastow, newly fired, spent the day on the phone with attorneys. From 11am to 1:30pm he was on a conference call with Michael Rubenstien, David Gerger, and Lea. Then from 1:30 to 3:00 he was on the phone with Gerger alone. Then at 5:30 he spoke to Gerger again for thirty minutes.

Michael Kopper’s Notes To Fastow Re: Chewco

Michael Kopper wrote an analysis of the distributions/purchase of Chewco’s interest in Jedi. Michael Kopper could be a novelist; his thoughts are clear, each one in a neat paragraph. Brilliant. In my opinion, this is a really cool document.

Thomas Bauer’s Memo Re: Chewco Investigation

This document is a memo drafted by Anderson auditor Thomas Bauer about the investigation into Chewco. I think the very last diagram (last page) is very good.