ENRONITIS – A COMMUNICABLE DISEASE

What at first was thought to be just the outrageous illegal excesses of one company (Enron) is now found to be an outbreak threatening to become an epidemic. In the Enron case, over $80 billion in value has disappeared from investment portfolios including pension funds, private 401K’s, IRA’s and other institutional and private investors. And that’s just the stock effect. Still to come are disclosures of the impact of loans from investment banks and bonds issued by Enron subsidiaries and "partnerships" which will be in the billions of dollars.

Before tracing the contagion of the "Enron Syndrome" we should try to clarify just exactly what Enron was doing. About the only consistent explanation in most of the media is that the company was hiding its true debt on the balance sheets of the partnerships. It was doing much more than that.

Enron set up more than 3,000 private "partnerships" with the aid of investment bankers who rounded up the investors to give the appearance of independent companies. With the connivance of the bankers, bond rating services and Wall Street analysts, bonds were then issued by the partnerships. The bonds were backed, not by the (nonexistent) assets of the partnerships, but by Enron stock. Enron stock at that time was the darling of Wall Street trading in $60-$80 dollar range. Given investment grade ratings by the ratings services and buy recommendations from Wall Street analysts, the bankers had no problem touting the investments to unsuspecting investors. Of course Enron is now a penny stock and the bonds have virtually no backing.

This stratagem worked so well the bankers began to recommend the structure to other clients. Chief among the investment houses were CitiGroup, Credit Suisse First Boston and Deutche Bank Alex Brown according to a 2/14/02 New York Times article. The practice became so lucrative that some of the banks began buying the bonds themselves and then peddled them to investors.

Two of the companies named in the Times article as adopting the Enron model are the Williams Companies and the El Paso Corporation. Both are also big players in the energy (oil and gas) markets. The major selling point of the model was that it would shield the bond liabilities from. investors’ view by keeping them on the partnerships’ balance sheets.

J.P Morgan Chase also had a "arrangement" with Enron where large sums of money were prepaid to Enron supposedly for future delivery of oil and gas commodities. These transactions were run through one of the partnerships and an entity called Mahonia Ltd., a subsidiary of Morgan Chase set up in Jersey in the (English) Channel Islands.

No commodities were ever delivered and the prepayment was returned to Morgan Chase plus about 3.4% of the contract. The transactions are being investigated, as they appear to be nothing but private loans to Enron outside of normal reporting requirements.

Morgan Chase required Enron to obtain performance bonds from insurance companies for the transactions with themselves as the beneficiary. Since the bankrupt Enron now cannot make good on the repayments, Morgan Chase has claimed payment from the insurance companies. The insurance companies are refusing to pay saying the transactions were misrepresented as commodity trades.

Morgan Chase has sued and, according to Standard & Poors, stands to lose over $5 billion if unsuccessful. One of the companies involved is Travelers Insurance, a subsidiary of CitiGroup. Ironically, and perhaps even poetically, this has the effect of the Rockerfellers suing themselves since they control both Morgan Chase and CitiGroup.

Are all these goings on legal? Where were the accountants and lawyers while this was happening? There is some confusion as to whether the partnership scheme was the brainchild of Enron management or of the consulting arm of Enron’s auditors, Arthur Anderson. It may be irrelevant since both embraced the concept wholeheartedly. Arthur Anderson is said to have passed the model on to some of its other big clients of which Global Crossings is one of the more notable.

Global Crossings, of course, is much in the new as it tries to sell its core business (a strategic fiber optic network) to a company with close ties to the government of Communist China. It also has gained notoriety for its chairman’s reaping of over $700 million in stock sales before the company went into Chapter 11 bankruptcy. (This dwarfs Enron CEO Ken Lay’s sales of $100 million.) Also Democratic National Committee chair Terry McAuliffe, who had a close relationship with the company, realized an $18 million profit from a $100,000 investment in Global Crossings.

Enron’s law firm, Vinson & Elkins evidently had no reservations about Enron securities earning fees in 1999 for advising on $3.4 billion in Enron offerings. The firm is also said to have given Enron (unknown) advice on document shredding by Enron and Arthur Anderson.

Arthur Anderson is no stranger to controversial accounting methods. It has lost several large class action civil law suits over its actions (or lack thereof) and at least two multimillion dollar fines for criminal complicity.

However, accountants, lawyers, investment bankers and Wall Street analysts have been emboldened by congressional legislation effectively giving them a "safe harbor" in relying on the statements of clients. In 1995, the Private Securities Litigation Reform Act (H.R. 1058) forbid private class action suits against such "professionals" in federal courts.

The bill was bitterly opposed by trial lawyers and severely conflicted the Democrat Party. It was essentially a confrontation between the lawyers on one hand and the investment community on the other. The bill was passed and sent to President Clinton who promptly vetoed it. Some say this was merely a symbolic gesture on his part since he must have known the votes were there to override his veto, which happened in short order. The vote to override was 319 to 100 in the House and 68 to 30 in the Senate. Thus the confrontation between the two special interest groups turned out to be strictly no contest with the bankers and their allies winning hands down.

But the bill left some loopholes. Trial lawyers shifted their private class action suits to state courts where the "safe harbor" provisions did not apply. Consequently, in 1998, the congress moved to remedy that oversight. Senator Phil Gramm, Chair of the Senate Banking Committee (whose wife sits on the Enron Board of Directors Audit Committee) introduced S.1260 "to limit the conduct of securities class actions under State law." While affirming the right for such lawsuits to be filed in state courts, it contained a provision for transferring such suits to federal court for dismissal. It also severely limited the amount of information that plaintiffs could obtain in the discovery process.

The bill passed by even larger margins than the 1995 bill with a 319 to 82 vote in the House and 79 to 21 in the Senate In the face of such overwhelming votes, Clinton meekly signed the bill into law. In the house the lone dissenting Republican vote was cast by Rep. Ron Paul of Texas (not one of Enron’s favorite congressmen). Paul was not in the congress during the 1995 vote.

In 1996 Enron had lobbied vigorously, but unsuccessfully, to get an exemption for its projects put into an update of the 1940 Investment Company Act. Failing that, its next step was to approach the Securities and Exchange Commission (SEC) for an exemption. Congress, in its wisdom, had given the SEC the power to exempt individuals and/or companies from the requirements of the 1940 Investment Company Act. This supposedly was to relieve small businesses from onerous reporting requirements.

As reported by Insight Magazine, Enron lobbyist Joel Goldberg approached Barry Barbash, SEC head of the Investment-Management Division about getting an exemption. In March of 1997 Barbash authorized the exemption writing, "It is ordered that the requested exemption from all provisions of the act is hereby granted."

According to Insight, Goldberg had been Barbash’s boss when both worked at the SEC in the 1980’s. The two are now partners in the Washington office of the Shearman and Sterling law firm.

Clinton appointed head of the SEC Arthur Levitt told the New York Times he has no recollection of the Enron exemption. However, Barbash told Insight he sent memos to Levitt and the commissioners and that the exemption was, "one of the most well-vetted things in Washington in its day."

With the exemption in hand and the accountants, lawyers and bankers protected from private class action lawsuits, it was full steam ahead with the results we see today.

Without the exemption, Enron officials could not legally have been on the boards of the partnerships. Also the reporting requirements would have made it difficult if not impossible to keep the liabilities off of Enron’s balance sheet.

However, the "safe harbor" may not be as safe as some thought. It does not protect against criminal activity or willful fraud if it can be proved. Although the Fifth Amendment protects the players from giving evidence against themselves, investigators seem to be turning up enough for a number of criminal convictions.

The ultimate effect on the stock market and the county’s financial structure is yet to be determined. If the Enron practices are as widespread in other companies, as some believe, we may be seeing a domino effect with Enron and Global Crossing only the beginning. There may never be a full accounting as to how much money Enron and others raised through these practices.

One aspect of the problem the media is avoiding like the plague is the possibility of money laundering for nefarious purposes other that personal enrichment. The labyrinth of several thousand companies scattered around the globe is a money launderers dream and a law enforcement nightmare.

The author is a free lance writer based in Romulus, Michigan. He is a former newspaper editor and investigative reporter, a retired customs administrator and accountant, and a student of history and the U.S. Constitution.

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You bet!

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I don't know how to add posts to the list, but here are links to two articles I posted in the last few days on the story of Florida's pension fund losing $300+ million as a result of bad investment decisions by one of their fund managers. One of the the executives of the financial management firm making the Enron purchases during its downhill slide was simultaneously serving on the Enron board. He's big-time Democratic party donor.

Seven of 10 Enron Committee Members Received Money From Company

Enron Stock Buy Vexes Nelson

to add posts to the list

All you need to do is type

Enron_List

in the "reply" box.... when you preview it, it will appear as *Enron_List and if you get a "can't find member" error, it only means the spelling or syntax is wrong- usually a missing capital, space, bar, etc.

Oops. Corrected sentence.

What I thought was interesting was the way the bankers steamrollered the trial lawyers in congress.

Thanks. Another irony is the fact (little noted in the media) that Ken Lay is a member of the Trilateral Commission, Rockefeller's spinoff from the Council on Foreign Relations. I wonder what they discuss at those meetings.

Also, since I wrote the article, we hear that Enron paid $400 million for a "study" of a potential pipe line transiting Afghanistan with a large share of the money going to the Taliban and bin Laden.

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