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Posted on 01/22/2002 9:01:40 AM PST by Elkiejg
Insight on the News - National
Issue: 02/11/02
The Cayman Islands should be just the first port of call in the search for the buried treasure of Enron, as SEC records further reveal that more than 3,000 "subsidiaries" were created by the company worldwide in exotic venues such as the Turks and Caicos Islands, Argentina, Mexico, the Netherlands, Barbados, Jamaica, Barranquilla (Colombia), and Venezuela, to name but a few.
Just what "business" was taking place in the infamous money laundries is anyone's guess. No detail is provided to the SEC about these offshore corporations and, for all intents and purposes, the corporate octopus to which the tentacles lead is little short of Winston Churchill's riddle wrapped in a mystery inside an enigma (see "Requiem for Enron," Jan. 7). While the financial data of this extraordinary number of "subsidiaries" may for the moment be safe, the lessons of the search for the Osama bin Laden's al-Qaeda financial network are not likely to be lost on authorities. At least one dramatic clue about the offshore corporations already has surfaced.
Recall that the Dec. 2, 2001, bankruptcy of Enron was explained as resulting from a handful of years of failing to report profits and loses of certain companies, particularly subsidiaries known as LJM1, LJM2 and Chewco (Cayman Islands corporations). According to the SEC filings by Enron these companies were "potential sources of capital to buy assets from Enron, potential equity partners for Enron investments and counterparties to help mitigate risks associated with Enron investments."
It's presumed that the wizards of Wall Street understand this explanation, but for those who aren't routinely betting the family farm on predicting the weather three months into the future, what these corporations were doing might seem vague. In short, according to one investment banker, "usually subsidiaries are set up offshore for the purpose of raising money through private investors, which then can be lent back to the corporation and used for future investments with no disclosure or oversight from U.S. tax and regulatory authorities." The difference between this and a Ponzi scheme apparently is one of intent, a dicey thing at best, say critics.
The Cayman Islands long have been a favorite location for corporations and individuals looking to escape taxation in the United States or to hide ownership or other activities. It is a problem so serious that last month Treasury Secretary Paul H. O'Neill signed an agreement with the island paradise to begin cooperating with U.S. tax investigators by 2004. Manhattan District Attorney Robert Morgenthau complained that the starting date of 2004 gives those cheating on taxes time to move their assets to new havens, and called on the Bush administration to activate the agreement immediately. Some in Congress agree.
While it still is unclear why the Houston-based darling of Wall Street chose to form thousands of subsidiaries in the Cayman Islands and other offshore lairs of the illicit, insiders agree that LJM1, LJM2 and Chewco appear to be only the tip of the iceberg. And if funny accounting on one or two questionable subsidiaries could sink this Titanic of corporate ships, congressional investigators ask, what other financial disasters are likely to surface when the sun shines on the others?
When Enron spokesmen attempted to explain, they said in November that the company used subsidiary "partnerships" to overstate its profits by about $600 million, then backed loans through these to get cash with which the fronts bought Enron assets at prices that made the company's investments look profitable. This goosed the price of the Enron stock and the worth of stock options, which company insiders were selling hand over fist. Who the "partners" were might prove interesting, especially if they lead from the launderers to Wall Street lenders and their friends.
At the top of the list of questions investigators will be asking are how much cash flowed through Enron via the subsidiaries, where it came from, who got it and where that money is now. But sources inside the world of high finance tell Insight that without a serious review of the company's trading records from Enron Online — reported to be a cash cow accounting for 90 percent of its business — and the corporation's bank and accountancy records, answers to these questions are unlikely to be uncovered.
It gets even more complicated. The purchase of Enron Online in early January by Union Bank of Switzerland (UBS), one of Enron's leading lenders, adds a new dimension to the already conflict-ridden investigation. Lawrence A. Weinbach, board member and vice chairman of the audit committee for UBS, was for nearly four decades with the accounting firm of Arthur Andersen. He retired in 1997 from Andersen Worldwide as its managing partner and chief executive.
Representatives of Arthur Andersen already are being accused of having cooked Enron's books. But it is Andersen's recent revelation that employees were instructed by a company attorney in an Oct. 12 memo to destroy all Enron audit materials, except for the most basic "work papers," that has put the once-respected accounting firm under a dark cloud. Investigators wonder what Andersen was so concerned about that it was willing to face charges of obstruction of justice rather than let anyone see those accounting records.
Furthermore, with the purchase of Enron Online, UBS not only takes control of the trading operations but of the trading records — crucial evidence in the investigation. Given the limbo between UBS and Arthur Andersen, many in the financial community wonder if investigators should subpoena the whole package to ensure against further destruction of records. Although the UBS/Andersen twist definitely is one for investigators to contemplate, in the end it may prove only half as interesting as some of the apparent conflicts of key Enron board members.
Take for instance Herbert "Pug" Winokur, who chaired the board's finance committee, which was responsible for ensuring the financial arrangements of the company were prudent and sound. A Harvard Ph.D., Winokur is the former chairman of Dyncorp, one of the federal government's biggest contractors. He remains chairman of DynCorp's compensation committee and is a major investor in that company. There is concern bordering on alarm among investigators that through this connection Winokur is in a position to obtain inappropriate information about the Enron investigations.
According to DynCorp's Website, that company has the contracts for information-technology services at the SEC and the U.S. Department of Justice (DOJ), including all 93 U.S. attorneys' offices. This means that DynCorp manages all e-mail and digital communications of the federal agencies now investigating Enron.
Winokur also serves on the Harvard Corporation Board, which oversees Harvard University and its $18 billion endowment. According to Harvard's 1999 tax filing, its most significant vendor relationship is with Highfields Capital Management, a hedge fund that had large Enron holdings created in 1998 by Harvard Management money manager Jon Jacobson.
During an April 2001 conference call among large investors, Jeff Skilling, then chief executive officer of Enron, got in a contretemps with Richard Grubman, managing director of Highfields, who was unhappy about Enron not producing certain financial information. Grubman declared: "You're the only financial institution that can't come up with a balance sheet or cash-flow statement after earnings!" Annoyed, the Enron chief called the money manager for the Harvard-connected firm a name and countered: "I don't think it is fair to our shareholders to give someone a platform like that for some personal, vested interest related to their stock position," inferring according to insiders that Highfields may have been short-selling the stock for Harvard — making money by trashing Enron.
Grubman's discomfort perhaps is even more interesting when one considers that Winokur, as chairman of Enron's finance committee responsible for the lack of financial information by Enron, is the same Winokur who oversees Harvard's investments. Whether Highfields was guessing about the looming meltdown of Enron or had inside information is a subject of interest to investigators of the growing scandal. A number of Harvard alums with inside connections to Enron also were active with Highfields, and at this level the players are well-known to each other.
For example, Winokur's partner at another investment firm called Capricorn Holdings is Harvard alum Dudley Mecum, who sits on the board of DynCorp. He also is on the board of one of Enron's leading lenders, Citigroup, which was put on the hook by the energy giant for $800 million. Mecum is joined at Citigroup by former Harvard board member and Clinton Treasury secretary Robert Rubin, whose alarm about the pending collapse of Enron led him to place calls to Peter Fisher, undersecretary for domestic finance at Treasury. Rubin asked "what he [Fisher] thought of the idea" of getting help with Enron's credit rating. Rubin reportedly said "this is probably not a good idea," and Fisher firmly agreed.
That it was not "a good idea" may be a Krakatoan understatement considering that Fisher may have been selected because someone thought he had conflicts in the Enron matter. Before becoming Treasury undersecretary, he was executive vice president of the New York Federal Reserve Bank under Chairman Peter G. Peterson. Peterson's position at the top of the U.S. establishment includes service as the current chairman of the Council on Foreign Relations and as a top financial adviser to Enron through his investment company, the Blackstone Group.
A senior banking analyst who asked not to be identified tells Insight that the incestuous connections surrounding the Enron debacle "provide a good clue about what was going on." The analyst says: "It is impossible for directors of this caliber, being so well-versed in finance, not to have known what was going on. Even though Enron hid most of what its trading operations were doing, there still would have been bells and whistles going off because of the sheer number of offshore subsidiaries and the closeness of the banking community at this level."
When you see all those subsidiaries in tax havens such as the Caymans, the analyst says, you have to ask why. "The fact that Enron had so much financial information hidden suggests fraud, and that's the public's perception. But right now there isn't enough information to be sure what Enron was doing and what caused the crash. Enron Online, which accounted for 90 percent of its business, was unique because not only does no one know how the trades worked, it was all but free from regulatory oversight. The fact that Enron would lobby for special regulatory treatment, even so, is interesting in and of itself. Why would an ethical company want to avoid basic reporting? In many ways, at this level, regulators provide feedback and often facilitate the way business is done. The question for all the finance guys, including the board at Enron, is why they were avoiding regulators and why they were hiding books and records on the sideline."
Allen "Sandy" Williams, an attorney with the law firm of Foley & Lardner, chairs that firm's regulatory-practice department, specializing in the energy industry. He tells Insight that "Enron was a very complex business, and I don't believe there was one person inside who knew everything that was going on. They had so many business ventures, trading desks and business startups that it would have been very difficult to track them all. In many ways, it appears as though the company believed that the Enron way was the unique and better way, and having that opinion may have allowed them to think that they could defy Newtonian principles of management."
Hubris is familiar enough. "In retrospect," Williams concludes, "you can look back and say Enron was a disaster, but whether the conduct was nefarious or negligent, purposeful or inadvertent, is still to be determined. Every day new information is coming out creating a lot of important questions that need to be answered. It's very hard in a publicly traded company not to be able to account for the dollars."
Meanwhile, an army of investigators is attempting to follow the money. They tell Insight they will be looking hard at the connections of Enron's board of directors to its lenders and investors. Naturally they will want to know about the more than $1 billion worth of Enron stock cashed out by Enron directors and executives between October 1999 and November 2001. They no doubt will want to know why friends among the Wall Street bankers kept lending huge sums to a company that was cooking its books. And they are certain to ask about $600 million in "losses" through those suspicious offshore subsidiaries in countries notorious for money laundering.
Kelly Patricia O'Meara is an investigative reporter for Insight.
Enron Insiders Who Sold Early
Lou Pai, chairman and chief executive, Enron Accelerator Shares sold: 5,031,105; Proceeds from sale: $353,712,438
Kenneth Lay, chairman and chief executive, Enron Corp. Shares sold: 1,810,793; Proceed from sale: $101,346,951
Rebecca Mark-Jusbasches, director Shares sold: 1,410,262; Proceeds from sale: $79,526,787
Ken Harrison, director Shares sold: 1,004,170; Proceeds from sale: $75,211,630
Kenneth Rice, president, Enron Broadband Services Inc. Shares sold: 1,138,370; Proceeds from sale: $72,786,034
Jeffrey Skilling, former Enron chief executive Shares sold: 1,119,958; Proceeds from sale: $66,924,028
Robert Belfer, president, Enron Broadband Services Inc. Shares sold: 1,052,138; Proceeds from sale: $51,080,967
Mark Frevert, chairman, Enron North America Corp. Shares sold: 830,620; Proceeds from sale: $50,269,504
Stan Horton, chairman, Enron Global Services Shares sold: 734,444; Proceeds from sale: $45,472,278
Joseph Sutton, vice chairman Shares sold: 614,960; Proceeds from sale: $40,093,346
Cliff Baxter, vice chairman Shares sold: 577,436; Proceeds from sale: $35,200,808
Joseph Hirko, senior vice president Shares sold: 473,837; Proceeds from sale: $35,168,721
Andrew Fastow, former chief financial officer Shares sold: 561,423; Proceeds from sale: $30,463,609
Richard Causey, executive vice president and chief accounting officer Shares sold: 197,485; Proceeds from sale: $13,329,743
James Derrick Jr., executive vice president and general counsel Shares sold: 230,660; Proceeds from sale: $12,656,238
Mark Koenig, executive vice president, investor relations Shares sold: 129,153; Proceeds from sale: $9,110,466
Cindy Olson, executive vice president, human resources Shares sold: 83,183; Proceeds from sale: $6,506,870
Steven Kean, executive vice president and chief of staff Shares sold: 64,932; Proceeds from sale: $5,166,414
Richard Buy, executive vice president and chief risk officer Shares sold: 54,874; Proceeds from sale: $4,325,309
Jeffrey McMahon, chief financial officer Shares sold: 39,630; Proceeds from sale: $2,739,226
Mike McConnell, president and chief executive officer, Enron Global Markets Shares sold: 30,960; Proceeds from sale: $2,353,431
John Duncan, director Shares sold: 35,000; Proceeds from sale: $2,009,700
Norman Blake Jr., director Shares sold: 21,200; Proceeds from sale: $1,705,328
Joseph Foy, former director Shares sold: 31,320; Proceeds from sale: $1,639,590
J. Mark Metts, executive vice president, corporate development Shares sold: 17,711; Proceeds from sale: $1,448,937
Charles LeMaistre, director Shares sold: 17,344; Proceeds from sale: $841,768
Robert Jaedicke, director Shares sold: 13,360; Proceeds from sale: $841,438
Ronnie Chan, director Shares sold: 8,000; Proceeds from sale: $337,200
Wendy Gramm, director Shares sold: 10,256; Proceeds from sale: $276,912
Totals: Shares sold: 17,344,584; Proceeds from sale: $1,102,544,671
Thomas E. White, Enron vice chairman, now secretary of the Army: $50 million to $100 million (est.)
Source: Washington Times and Newswire
Recipients of Enron Political Contributions
Enron Congressional Donations
Total to House: $605,988
Total to Senate: $530,493
Total to Republican: $763,828
Total to Democrats: $367,653
Enron Gifts Promised by Politicians to be Donated to Charity: $302,050
Top Senate (1989-2001)
1. Kay Bailey Hutchison (R-Texas): $99,500
2. Phil Gramm* (R-Texas): $97,350
3. Conrad Burns (R-Mont.): $23,200
4. Charles E. Schumer* (D-N.Y.): $21,933
5. Michael D. Crapo* (R-Idaho.): $18,689
6. Christopher S. Bond (R-Mo.): $18,500
7. Gordon Smith (R-Ore.): $18,000
8. Jeff Bingaman (D-N.M.): $14,124
9. Chuck Hagel* (R-Neb.): $13,331
10. Pete V. Domenici (R-N.M.): $12,000
11. John B. Breaux (D-La.): $11,000
12. John McCain (R-Ariz.): $9,500
13. Robert F. Bennett (R-Utah): $8,053
14. Pat Roberts (R-Kan.): $8,000
15. Bob Graham (D-Fla.): $8,000
*Banking Committee member
Top House (1989-2001)
1. Ken Bentsen (D-Texas): $42,750
2. Sheila Jackson Lee (D-Texas): $38,000
3. Joe L. Barton (R-Texas): $28,909
4. Tom DeLay (R-Texas): $28,900
5. Martin Frost (D-Texas): $24,250
6. Charles W. Stenholm (D-Texas):$14,439
7. Chet Edwards (D-Texas): $10,000
8. Doug Bereuter** (R-Neb.): $10,000
9. Larry Combest (R-Texas): $9,820
10. John D. Dingell* (D-Mich.): $9,000
11. Edward J. Markey* (D-Mass.): $8,500
12. Earl Blumenauer (D-Ore.): $8,500
13. Kevin Brady (R-Texas) $8,000
14. Sam Johnson (R-Texas): 7,750
15. Pete Sessions (R-Texas): $7,750
*Energy and Commerce Committee member **Financial Services Committee member
PAC Contributions (1997-2001)
Hillary Rodham Clinton for U.S. Senate: $4,000
Lazio 2000 Inc.: $1,000
Gore 2000 Inc.: $1,000
Friends of Joe Lieberman: $2,000
Citizens for Arlen Specter: $3,000
DNC Non-Federal Unincorporated Association Account: $25,000
DNC Non-Federal Individual: $25,000
Democratic Congressional Campaign Committee Expenditures: $5,000
Gore Lieberman General Election Legal and Accounting Compliance Fund: $1,000
Presidential Candidate Donations (1993-present)
George W. Bush (R) $113,800
Bob Dole (R) $95,650
Al Gore (D) $13,750
George H. W. Bush (R) $13,000
Bill Clinton (D) $11,000
Enron Political Donations (1998-present)
Total: $2,568,214
Total Democrat: $646,615
Total Republican: $1,441,849
Brandon Spun and Hans Nichols are reporters for Insight. Christopher Jolma is a research associate.
A Sample of the Nearly 700 Enron Corp. Subsidiaries Incorporated In the Cayman Islands
Atlantic Commercial Finance B.V.
Compression Projects Finance Ltd.
EDC Atlantic Ltd.
Enron Dominican Republic Ltd.
Enron Dominican Holding Ltd.
Enron Dominican Limited Partnership
Azurix AGOSBA Holdings Ltd.
Azurix AGOSBA Ltd.
Azurix Brasil Holdings Ltd.
Azurix Brasil Development Ltd.
Azurix Brasil Investments Ltd.
Azurix Buenos Aires Investments Ltd.
Azurix Argentina Finance Ltd.
Azurix Chaoyang Holdings Ltd.
Azurix Chile Holdings Ltd.
Azurix Buenos Aires Investments Ltd.
Azurix Ghana Ltd.
Azurix Ghana Operations Ltd.
Azurix Islands Ltd.
Azurix Jamaica Ltd.
Azurix Kuwait Ltd.
Azurix Misiones Holdings Ltd.
Azurix Misiones Ltd.
Azurix Rio Holdings Ltd.
Azurix Campos Grande Investments Ltd.
Azurix Cuiaba Investments Ltd.
Azurix Lagos Investments Ltd.
Azurix Manaus Investments Ltd.
Azurix Rio Investments Ltd.
Azurix Suzhou oldings Ltd.
Azurix Suzhou Water Holdings Ltd.
Azurix Tangiers Ltd.
Azurix Tetouan Ltd.
PUMC Finance Ltd.
Pelican Bidder Cayman Ltd.
ECT Colombia Pipeline Holdings 2 Ltd.
Enron AGUAVEN Holdings Ltd.
Enron Aguaven Investments Ltd.
Enron Agua Venezuela Ltd.
Enron Americas Limited
BR-VT Holdings Ltd.
Enron Benin Power Ltd.
Electricite du Benin Holding Ltd.
Enron Benin Power Holdings Ltd.
Electricite DuBenin
Gazoduc du Benin
Gazoduc du Benin Holding Ltd.
Enron Biomass Ltd.
Enron Border Holdings Ltd.
Enron SAM Border Ltd.
Enron Changjiang Utilities Holdings Ltd.
Enron China Gas Transport Ltd.
Enron CI-GH Pipeline Ltd.
Enron Cote d'Ivoire Pipelines Ltd.
Enron Indonesia Pipeline Ltd.
Enron Hong Kong Investments Ltd.
Enron DRI Development Holdings Ltd.
Enron Hainan Ltd.
Enron Inchon Power Holdings Ltd.
Enron International China Gas Ltd.
Enron China Ltd.
Enron Japan Strategic Investments Ltd. Enron Korea Gas Holdings Ltd.
Enron Nigeria Barge Holding Ltd
Enron Siam Energy Holdings Ltd.
Enron Sichuan Holdings Ltd.
Enron Sichuan Ltd.
Mozambique Steel Holdings Ltd.
Enron Taiwan Power Holdings Ltd.
Hainan Funding Ltd.
Multiva Holdings Ltd.
Citadel Corporation Ltd.
Enron Egypt Power Ltd.
Enron Gas de Venesuela Ltd.
Enron Venezuela Services I Ltd.
Enron Venezuela Services II Ltd.
Enron Venezuela Services III Ltd.
Source: Enron's 2000 filing with the Securities and Exchange Commission
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