Today in 2002, the NatWest Three were charged with wire fraud in a transaction involving Enron. The three former employees of National Westminster Bank (Gary Mulgrew, Giles Darby and David Bermingham) were accused of secretly investing in an Enron special purpose entity, Southampton, and siphoning off $7.3 that belonged to National Westminster Bank. The criminal complaint, filed in Houston Texas, alleged that Mulgrew, Darby and Bermingham recommended that an interest in an Enron-related partnership held by Nat West should be sold for $1 million at a time when the defendants were scheming with Enron executives to purchase that interest for themselves for only $250,000, and then liquidating it only weeks later for over $7.3 million. The complaint alleges that the defendants: (i) knew the details of Nat West’s interest because they helped structure it; (ii) were aware that the investment had a minimal value of between $7 million and $9 million in February 2000; (iii) represented to Nat West that $1 million was a fair price; (iv) secretly negotiated their own purchase of Nat West’s interest while still employed at Nat West; (v) along with Enron executives, set up a series of offshore entities to carry out their scheme; and (vi) all the while, were employees of Nat West that had fiduciary duties to Nat West and were subject to its compliance policies.
This was, of course, nonsense.
The NatWest bankers became aware through news reports that the transaction – one of Fastow’s deals – was being investigated for fraud. They did the only conscionable thing to do, and alerted the UK authorities. The UK authorities contacted the SEC, and before even a single US investigator had talked with them, they were named in a criminal complaint.
(If you ever wonder if you should speak up when you believe yourself to have been an unwitting partner in something nefarious, that is your answer.)
Tom Kirkendall has a succinct summary of the transaction:
the case against the NatWest Three is fairly straightforward, at least as Enron-related criminal cases go. The Task Force alleges that the three defrauded their former employer by conspiring with Fastow and Kopper to underpay NatWest for its interest in an entity named Swap Sub, an affiliate of LJM1, the Fastow/Kopper-managed special purpose entity that was created in 1999 to hedge Enron’s valuable but highly volatile interest in a technology company called Rhythms.
Fastow arranged to have an entity called Southhampton that was owned by his family, Kopper and several other Fastow underlings at Enron (including Ben Glisan) buy NatWest’s interest in Swap Sub in March, 2000 for $1 million, which was substantially more than NatWest had that interest valued at the time. After NatWest sold out, Fastow sold a portion of the old NatWest interest in Swap Sub through Southhampton to the three bankers personally for $250,000. About a month and a half later, Fastow and Kopper arranged to have Enron and Swap Sub unwind the hedge on the Rhythms stock, which resulted in Enron purchasing a large chunk of Enron stock from Swap Sub. The NatWest Three’s net share of the Enron stock sales proceeds was $7.3 million.
In short, the Task Force alleges that the NatWest Three’s making $7.3 million on an investment of $250,000 a month and a half earlier violates the “too good to be true” rule. Presumably, Fastow and Kopper are prepared to testify that the NatWest Three knew that Fastow and Kopper had arranged with Enron to unwind the hedge on Rhythms stock with Swap Sub, knew that such unwinding would make Swap Sub worth much more than NatWest had it valued at the time, and that neither Fastow nor the NatWest Three disclosed the situation to NatWest before the bank sold its interest in Swap Sub to Southhampton for a measly $1 million.
For their part, Bermingham, Mulgrew and Darby contend that they knew nothing about Fastow and Kopper’s plan to unwind the Rhythms hedge with Enron, that the $1 million price that Southhampton paid for NatWest’s interest in Swap Sub was substantially more than it was worth at the time, that the $250,000 price they paid for an interest in Swap Sub was similarly reasonable given the risk of the investment, and that they were as pleasantly surprised as anyone on the big return on their investment when Enron and Swap Sub unwound the hedge a month and a half later (remember, all this took place before the bursting of the stock market bubble on tech stocks). Interestingly, despite the fact that all of the foregoing information has been well-known to NatWest for several years now, the bank did not pursue either a civil case or criminal prosecution of the NatWest Three in the UK.
By the way, colorful Houston-based criminal defense attorney Dan Cogdell, who successfully defended former Enron in-house accountant Sheila Kahanek in the Nigerian Barge case, is defending Bermingham. Cogdell’s involvement ratchets up the entertainment value of any case, so stay tuned.
Today the NatWest Three are serving their sentences in prison. Gary Mulgrew is projected to be released on 01-02-2011, Giles Darby on 01-09-2011, and David Bermingham on 01-11-2011. However, with a 15% reduction for good behavior, we can expect them out in the summer of 2010.