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.

Arthur Andersen Acknowledges Andy Fastow’s Divestment From LJM

Arthur Andersen letter acknowledging Andy Fastow’s divestment from LJM, with Andy’s signature at the bottom.

James Derrick Asks Andy Fastow About His Involvement In LJM

This looks like Enron General Counsel James Derrick has sent a memo to V&E attorney James Dilg proposing language to ask Andy Fastow about his involvement in LJM.

I’m not positive that’s what’s going on but that’s what it looks like.

A Momentary Flash Of Pleasure

This came across my desk today:

I know it is nerdy but it made me giggle. It makes me wonder about the people who named their company “LJM Partners”. Like naming your son Ted Bundy Johnson. Not that there was anything inherently wrong with LJM. Had it been run by someone who was not the CFO of Enron Corp. it would have been just peachy.

Coulda woulda Prada.

Jordan Mintz’s Documents

These are some of Jordan Mintz’s documents (from the General Counsel office).

In this memo, Mintz addresses a private placement for LJM3 (here is a document about a different private placement for LJM2).

Mintz also had something to say to Andy Fastow about the LJM2 proxy statement.

This letter became quite controversial because Jeff never got around to signing an approval sheet, despite the system in place that required it. Mintz said that he put it on his desk, but Jeff said he never saw it, which is completely believable because the man was busy running a company.

Mintz spoke to outside counsel about LJM.

And Mintz wrote a document about the sale of Enron Wind to LJM

LJM Documents

These are just some LJM documents; I will eventually get around to putting them in order and giving them context.

LJM2 Private Placement documents.

LJM Approval Sheet

LJM Services Agreement signed by Andy Fastow (twice) and Rick Causey.

I think this is Thomas Bauer’s handwriting but I am not positive. LJM Legal Review

Arthur Andersen and LJM

This is a Washington Post article from February 2002.

Anderson and LJM

An Example of Conflict of Interest

I found this in a public filing today:

Related party transactions
At June 30, 2010, the Company owed (amount deleted) to (deleted) (purchased by deleted in 2009), a former related party with common directors and officers. These fees relate to general and administrative expenses for the purposes of sharing the same office space and equipment.

A director of the Company is a partner at a law firm that provides legal services to the Company. For the six months ended June 30, 2010, no fees (June 30, 2009 – nil) were charged for services provided from the firm.

All related party transactions are conducted in the normal course of business operations and are measured at the exchange amount, which is established and agreed to based on standard rates, time spent and costs incurred.

And yet nobody seems too concerned about this. It did make me think about Andy Fastow and how people make such a huge big deal out of the fact that he was both an officer at Enron and LJM – a relationship that some may think was a conflict of interest.

But in this modern example, he’s a LAWYER providing legal advice to a company where he is also the director. That seems to me much more problematic.

I guess if anything happens at Enron, it’s automatically controversial. But if it happens anywhere else, it’s just business.

Hypocritical much?

Three Percent

One of the repeated complaints I hear about LJM and other special-purpose vehicles is that only three percent of liquidity came from other investors for the investment to conform to GAAP and be legitimately separate from Enron. This always amazes me for two reasons. The first is, that’s the law. Enron didn’t create the law. Enron was only doing what the law demanded. The second is the more salient point.

Three percent is what a buyer must put down for a Fannie Mae or Freddy Mac mortgage. Sometimes you don’t even need three percent. So if you’re in a home or car or any other asset in which you paid only three percent down, you are automatically disqualified from complaining.

When the rule was changed in 2002, the SEC, in its infinite wisdom, increased the amount at risk to be at least ten percent.

I marvel at the literal-minded robots who work at the SEC. Enron cobbled together the three percent outside equity – as the law required – but is there any doubt that Enron could have also found ten percent, or twenty, or fifty?

The Raptors absolutely conformed to the rules. The fact that the company collapsed gave investigators an opportunity to accuse not just people who worked there, but even the business structures that were in place to benefit all complex companies.

America As Enron

The primary criticism about LJM was that it violated GAAP because no risk was transferred to outside investors. The accounting rules recognize that risk creates opportunity for success and the only way to make money.

On June 9 of this year, Timothy Gaithner said:

“A centerpiece of what the President will recommend in terms of financial reform will be a much more conservative set of constraints on risk-taking across the financial system.”

Based on this statement, what Obama wants is Fastow. Apparently, Fastow did an improper deal that eliminated investor risk — that’s not right.

What Obama needs is the real Enron, the company that overwhelmingly did real deals involving real risk. It is true that Enron over-leveraged itself, but the federal government is the most leveraged institution in the history of this nation. So a movement back to Enron-level leverage would be a dramatic change for our irresponsible government.

So, in other words, the government not only learned nothing from the real Enron, it is in fact copying the guy who is probably the only true Enron wrong doer.

Today In Enron History

September was a strange month in the company. For a while, it seemed as if the tumult of Skilling’s departure in August, and the upset created by Sherron Watkins’ memo, had abated a little bit. For a few days, there were no shocking revelations, no crazy allegations. Just normal work.

But all was not well.

The Woodlands is a small community outside of Houston.   In 2001, it was becoming a popular neighborhood for Houston commuters  to live.  It was here, at the Woodlands Conference Center, on September 7-10, 2001, that the Management Committee met.

Enron had polled its employees about their concerns, and the results were not good. Employees reported feeling a lot of anxiety. Watkins’ memo had inspired rumors about aggressive accounting. Additionally, since the first appearance of LJM in the Wall Street Journal, journalists wanted to know more about the partnership.

At the meeting, a PR manager, Mark Palmer, announced, “We are entering into crisis.” His idea to head off the questions and uncertainty was to acknowledge LJM in an open, non-defensive way, apologize for not being as open as it could have been, and then act to show the Street that Enron was striving to be more transparent about LJM. (It is worth noting that the secrecy of LJM is directly attributable to Andy Fastow. He flatly refused several requests by the Wall Street Journal to discuss the partnerships. When Palmer practically begged him to talk to the reporters, he got angry and said talking to them would be the worst thing he could do. He flat-out refused to entertain questions, which no doubt added to the illusion that Enron was hiding something.) Andy Fastow, of course, did have something to hide. He had been lying about his compensation from the partnerships from the beginning. If Jeff Skilling or Ken Lay had known that Fastow was earning in the double-digit millions for his reported “three hours a week” of time spent on the partnerships, they would have been furious because it was critical to keep the lion’s share of his income from Enron, supposedly assuring his loyalty to the company.

A few days after the Woodlands meeting, Fastow’s partner, Michael Kopper, drove to a dumpster and threw away his laptop. The laptop had kept a running tally of who was making what on the illegal schemes – and both of them felt the time had come to ditch the proof of their malfeasance.

In addition to the LJM disclosure issue, the Vinson and Elkins’ investigation into Watkins’ claims continued apace.

Meanwhile, investors were worrying about the company as the stock continued to shed value. The small, buzzing question about LJM might have contributed to the general feeling of uneasiness over the stock.

If there was any sense of peace or rejuvenation in the suburban enclave of the Woodlands, it was short lived. Because everything was about to get so much worse.

Today In Enron History

August 28, 2001.

Greg Whalley was tapped as president and COO and Mark Frevert was promoted to vice-chairman to help fill the vacancy in leadership created when Jeff Skilling resigned the previous week.

“Greg and Mark bring a wealth of talent and experience to the office of the chairman,” said Dr. Lay in a statement. “In addition to having led Enron Wholesale Services, they have a collective 26 years of extensive experience across Enron’s businesses, and both played key roles in increasing our deliveries of energy and other commodities in North America and Europe.”

By this time, Enron stock had declined 10% since Skilling resigned. When the positions were announced, the stock rose 1.7%, to $38.40.

Andy Fastow had a busy day. Lots of meetings, interrupted at noon for lunch with Lea and his children at the office. After lunch, he had yet more meetings – three with Michael Kopper alone. At the end of the day, he attended Happy Hour for Michael Kopper’s going away. Then he went to a baseball game, Cincinnati Reds Vs. Houston Astros.

Because of the general busy-ness of the day, it is impossible to know if either Dr. Lay or Andy Fastow knew what had been printed that morning in the Wall Street Journal, though we are certain they found out later. It was a small item in the “Heard on the Street” column, written by Rebecca Smith and John Emshwiller. It said that Dr. Lay was promising more transparency to investors and to abandon the in-your-face management style that had become so infamous at Enron. But the real importance of the article was that it was the first time LJM was mentioned in a national newspaper. It revealed that Andy Fastow had sold his interest in them and quoted Lay saying it had become a “lightening rod” inside the company.

Jeff Skilling remained on vacation, rafting with his son.