[CTRL] Fwd: financial documents and partnership records related to LJM2 Co

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http://www.smartmoney.com/stockwatch/specialreport/index.cfm?story=200201182   Special Report The Enron Papers By Matthew Goldstein January 18, 2002 MANY VOICES on Wall Street have professed bafflement at the sudden collapse of Enron (ENRNQ). According to the many investment bankers and trading partners who did business with the company, the commercial banks that lent it money, and the securities analysts who followed it, the accounting maneuvers Enron allegedly used to inflate its profits and hide its debts were so complex and so hidden from view that no one could have foreseen the outcome. It turns out, however, that some of the biggest names in American finance were active participants in Enron's strategy. SmartMoney.com has obtained a number of financial documents and partnership records related to LJM2 Co-Investment partnership, one of the key entities relied on by Enron. The documents — four books altogether measuring more than two inches high — reveal that a virtual Who's Who of financial institutions invested in the $394 million fund established in 1999 by former Enron Chief Financial Officer Andrew Fastow. The documents provide a breakout of the estimated rates of return on the more than a dozen investments made by LJM2. They even offer an explanation for how those mysterious Raptors worked — the subsidiaries LJM2 established to carry on hedging activities with Enron. We're making selections from the documents available for download in PDF format. The documents make one thing clear: LJM2 was anything but an arm's-length entity for Enron — as it would've had to be for Enron's accounting treatment of it to have been legitimate. "The Partnership expects that Enron will be the Partnership's primary source of investment opportunities and that the Partnership will co-invest with Enron," according to one document. As the documents state, the partnership was created and managed by then-CFO Fastow and was "focused on acquiring energy and communications assets primarily owned by Enron." And while Jeffrey Skilling, Enron's former chief executive who suddenly resigned last August, told the New York Times in December that he didn't have View the document many details about partnerships like LJM2, the records show Skilling was a guest speaker at LJM2's annual partnership meeting on Oct. 26, 2000. Some highlights from the documents: "LJM Rationale": LJM2 was formed in October 1999 with the stated goal of acquiring assets primarily owned by Enron and generating a 30% average annual return for its limited-partner investors. Why focus on Enron assets? The documents explain that some of those assets were diluting Enron's earnings and harming the ratios on which its credit ratings were based. It wanted to "deconsolidate" those assets and "create structures which accelerate projected earnings and cash flows." A selling point to potential investors in LJM2: "The Partnership expects to benefit from having the opportunity to invest in Enron-generated investment View the document opportunities that would not be available otherwise to outside investors." Investors: The papers contain a partial list of the biggest companies and financial institution that are known to have invested in LJM2, either directly, through subsidiaries or on behalf of third parties: American International Group (AIG), AON (AOC), Citigroup (C), CIBC, Credit Suisse First Boston, Dresdner Bank, General Electric (GE), J.P. Morgan Chase (JPM), Lehman Brothers (LEH), Morgan Stanley (MWD), Merrill Lynch (MER) and Wachovia Bank (WB). Smaller institutional investors were also involved, including pension funds and private equity funds. These included Aero Capital, Alpine Investment Partners, C&I Partners, Cramer Rosenthal McGlynn, Fort Washington Private Equity, Freidenrich Family Trust (associated with Bay Partners, a big California venture-capital firm), View the document Lakeview Capital Management, Mousse Partners, Rho Management, the State of Arkansas Teachers Retirement Fund, Ulysses Partners and Weyerhaeuser Employee Retirement Trust (WY). LJM2 Key Employees: As of early 2000, LJM2 was being managed by Fastow; Michael Kopper, former managing director of Enron's Global Equity Markets Group; and Kathy Lynn, a former Enron vice president. Fastow, during his tenure at LJM2, earned roughly $30 million in management fees. Advisors: The partnership employed Big Five accounting firm PricewaterhouseCoopers and Chicago-based law firm Kirkland & Ellis, where Whitewater prosecutor Kenneth Starr is a partner. Bankers: Two banks were LJM2's main lenders: Chase Manhattan Bank, part of J.P. Morgan Chase, and Germany's Dresdner Bank, a division of Dresdner Kleinwort Wasserstein. View the document More On Nov. 30, 2001, just days before Enron would file for bankruptcy, Dresdner Bank sent LJM2 a letter informing it that it had defaulted on a provision of its loan agreement. View the document Working Capital: As of April 2000, LJM2 had raised $394 million. Of that amount, 42% came from top-rated financial institutions and insurance companies, 36% was invested by individuals and private equity funds and the remaining 22% came from employee pension funds. The value of the assets held by the partnership as of Sept. 30, was $156 million, down 39% from Dec. 31, 2000. Investments: LJM2 invested in a total of 23 investments — most of them involving Enron-related entities — with odd-sounding names like Bobcat, Osprey View the document Trust, Apex, Rawhide and Talon. The five biggest investments were: NewPower Holdings (NPW), $50 million; Bobcat I, $30 million; Osprey Trust, $26 million; Apex, $25 million and Zenith Telecom Trust, $21 million. NewPower is a deregulated electrical power company that Enron spun off in October 2000 (see related story). Bobcat is a so-called special entity, like the Raptors (see below) that Enron and LJM2 used to hedge investments. Osprey Trust is an investment vehicle set up by Enron and another limited partnership, Whitewing, which sold $1.4 billion in corporate bonds. Apex is a collaterized loan obligation — a derivative security whose underlying instrument is a commercial loan — that LJM2 has with First Union, which since has been acquired by Wachovia Bank. Zenith is one of the few View the document non-Enron investments made by LJM2. It was an investment in an off-balance-sheet partnership established by TXU (TXU) called Pinnacle One Partners. The Raptors: These are a structured finance vehicle — usually capitalized with Enron stock and an investment from LJM2 — that enters into derivative, or hedging, transactions all designed to reduce the risk associated with Enron's own investment portfolio. There were at least six Raptors created by LJM2. The Raptors helped manage the impact of price volatility of Enron's stock investments by purchasing put and call options on those shares. (A call option is a bet a stock will rise in price, while a put option is a bet it will fall.) But the Raptors posed a problem if Enron's stock dropped below $48 a share — something that first occurred in early August, around the time Skilling suddenly resigned. View the document In the event of such a drop, Enron would have to give the Raptors more of its stock in an attempt to keep them solvent, and this would be potentially dilutive to the stock.

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