From: "Jim Rarey" <[EMAIL PROTECTED]>
To: "Medium Rare Distribution"
<[EMAIL PROTECTED]>
Subject: ENRONITIS - A COMMUNICABLE DISEASE
Date: Thu, 28 Feb 2002 12:46:53 -0500
X-Priority: 3
MEDIUM RARE
By Jim Rarey
February 27, 2002
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
(non-existent) 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 multi-million 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 launderer's dream and a law
enforcement nightmare.
Permission is granted to
reproduce this article in its entirety.
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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Brian Salter .... [EMAIL PROTECTED]
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Brian Salter .... [EMAIL PROTECTED]
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