Posted on 06/29/2002 9:17:31 PM PDT by lewislynn
June 28, 2002, 11:07PM
THE charges filed against three British bankers Thursday for defrauding their company through an Enron-related partnership bring investigators within firing range of a number of Enron insiders.
The bankers were charged by Enron Task Force investigators with defrauding their employer, National Westminster Bank, out of about $7.3 million through a complex transaction that required the cooperation of a number of former Enron executives.
For the transaction, the three men and their Enron colleagues used a partnership called Southampton, named for the Houston neighborhood where many of the Enron executives that invested in it live -- including former Chief Financial Officer Andrew Fastow and former executive Michael Kopper.
To understand why Southampton was formed and how the British bankers play into the larger Enron investigation, one first needs to understand a different Enron partnership, LJM Cayman.
In June 1999, Fastow discussed with then-Enron Chairman Ken Lay and Chief Executive Officer Jeff Skilling the creation of a partnership to help the company hedge against risky investments, including shares in a young technology company that is now defunct, Rhythms NetConnections.
The partnership needed to be independent from Enron in order for the hedge to work. So Fastow told other Enron officials he would personally invest $1 million in the partnership and get $15 million from outside investors. Fastow would serve as the managing partner of LJM Cayman, a move that would require Enron's board of directors to waive its ethics code. On June 28, 1999, the board did just that.
Fastow solicited Credit Suisse First Boston and National Westminster as investors. CSFB created an entity called ERNB Ltd. to channel $7.5 million to LJM Cayman, while National Westminster created Campsie Ltd. to deliver its $7.5 million investment.
That $15 million, combined with Fastow's $1 million, was used to essentially purchase warrants for 3.4 million Enron shares. The parties then used 1.6 million of those shares to create yet another partnership, named Swap Sub.
On June 30, 1999, Swap Sub entered into the hedge agreement with Enron where it purchased the right to buy up to 5.4 million shares of Rhythms NetConnections stock. The idea was that if the value of the Rhythms stock declined, Swap Sub would make up the difference Enron lost on that stock.
According to the government's charges, in late January 2000, the NatWest bankers realized their company's stake in Swap Sub was worth much more than the original investment, and they argued it would be a good time to unwind the arrangement.
The government charges describe e-mail discussions between two of the bankers where they say they would be "delighted if he has found a way to lock it in and steal a large portion for himself," in an apparent reference to Fastow. "We should be able to appeal to his greed."
On March 16, 2000, NatWest sold its share to Southampton K Co., a subsidiary of Southampton controlled by Kopper, for $1 million. A day later, Southampton K Co. bought CSFB's shares with a $10 million loan from Enron. How the NatWest bankers were able to convince their superiors their $7.5 million investment had decreased in value to $1 million while CSFB's grew is not clear.
The three British bankers then arranged to buy Southampton K Co. for about $250,000. They netted a profit of $7.3 million and split it three ways.
According to Enron's internal investigation, the Southampton partners -- namely the Enron executives -- reaped nearly $8 million from the deal. Fastow is reported to have earned $4.5 million from his investment.
Robert McCullough, a Portland, Ore.-based economist, said that the Southampton partners may have earned more than that, however.
A split in Enron's stock in August 1999 doubled the number of shares in Swap Sub from 3.4 million to 6.8 million. When Swap Sub was later unwound, those additional 3.4 million shares, plus 300,000 left over, were never accounted for. If the stock was valued at about $80 at that time, McCullough said, there's about $233 million in value that has yet to be accounted for.
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