Enron’s off-balance-sheet vehicles

analysisAccording to the Senate Permanent Subcommittee on Investigations, an October 2000 presentation told the Finance Committee that Enron had $60 billion in total assets, of which about $27 billion, nearly 50 percent, were lodged with unconsolidated affiliates such as Whitewing, the LJM partnerships, JEDI and the Hawaii 125-0 Trust, which were not included in Enron’s financial statements but which Enron treated as part of its holdings; the staff of the Joint Committee on Taxation (JCT) gave approximately the same figures. No Board member objected. In the same report the Subcommittee identified JEDI, Chewco and the Hawaii 125-0 Trust, alongside Whitewing and the LJM partnerships, as unconsolidated affiliates that Enron helped establish and run and that were known to and approved by the Board, each with a history of multi-million-dollar transactions with Enron. All the directors it interviewed were well aware of and supported Enron’s focus on its credit rating, cash flow and debt burden; only one expressed concern about the share of Enron’s assets no longer on its balance sheet. These are congressional findings, not judicial ones. The JCT staff noted that the off-balance-sheet structures became an issue in Enron’s bankruptcy proceedings, in which its unsecured creditors sought documents and testimony regarding 52 of its off-balance-sheet affiliates. ^{1 2}

analysisIn 1993 Enron and the California Public Employees’ Retirement System (CalPERS) formed the Joint Energy Development Investments Limited Partnership (JEDI), each owning 50 percent; the Powers Committee described it as a $500 million joint venture. Because the partners shared control, Enron did not consolidate JEDI and did not show JEDI’s assets or debt on its balance sheet, according to the JCT staff and the Powers Committee. Enron’s November 2001 Form 8-K stated that an Enron subsidiary was JEDI’s general partner and CalPERS its limited partner from June 1993 to November 1997. A February 2002 press report citing CalPERS records stated that the pension fund cashed out of JEDI for more than $380 million in November 1997 and the following month pledged $500 million to a second partnership, JEDI II, which invested in Enron Energy Services and 22 other entities. Further JEDI II investments were suspended in June 2001, and when Enron filed for bankruptcy the fund was still working with the partnership to liquidate JEDI II’s investments, according to the same report. ^{1 2 3 4}

analysisAccording to the JCT staff, in late 1997 Enron wanted CalPERS to make a large investment in a second partnership, JEDI II, and sought a buyer for CalPERS’ JEDI interest. When no third party showed interest, certain Enron employees, with Enron’s assistance, formed Chewco Investments, L.P., a Delaware limited partnership, to acquire it; Enron intended Chewco to be unconsolidated so that Chewco and JEDI stayed off its balance sheet. Enron’s November 8, 2001 Form 8-K stated that in November 1997 JEDI made a $383 million liquidating distribution to CalPERS and Chewco concurrently bought a limited partnership interest in JEDI for $383 million, financed with a $132 million interest-bearing loan from JEDI and $240 million borrowed from a third-party financial institution under an Enron guarantee. Michael J. Kopper, a non-executive officer of an Enron division, invested in Chewco’s general partner and was its manager at the time. Kopper and others, including Andersen, declined to speak with the Powers Committee about why Chewco was structured in a way that did not comply with the non-consolidation rules. ^{1 2 3}

analysisThe SEC alleged in its August 2002 complaint against Kopper that Enron funded the November 1997 buyout with bridge loans of $191.5 million each from Barclays Bank PLC and Chase Manhattan Bank, guaranteed by Enron. Chewco’s year-end structure, according to the complaint, comprised a $240 million Enron-guaranteed Barclays loan, a $132 million JEDI advance and about $11.49 million of apparent equity, of which $11.03 million was borrowed from Barclays by Kopper-controlled entities against about $6.58 million of cash held in accounts pledged to Barclays; Kopper and his domestic partner supplied $125,288. These were allegations: Kopper settled the SEC action without admitting or denying them, agreeing to disgorge and forfeit about $12 million, and pleaded guilty in August 2002 to conspiracy to commit wire fraud and money laundering. ^{4 5 6}

analysisThe court-appointed bankruptcy examiner Neal Batson found in his third interim report of June 30, 2003 that Chewco’s equity was to come from entities controlled by Kopper and his friend William Dodson, but that nearly all of it, about $11.4 million, came from Barclays under funding agreements protected by $6.6 million of reserve accounts, leaving a net $5 million at risk, below the required 3 percent. Enron officers knew of the accounts but may not have disclosed them to Andersen; their revelation in 2001 forced a restatement for 1997 through September 2001 that cut income by $400 million and equity by $800 million and raised debt by $600 million. That is an examiner’s conclusion, not a court judgment. The sources differ on whether Kopper transferred all or part of his Chewco interest to Dodson: a 2002 press report stated that in late 1997 Kopper transferred his interest in Chewco to William Dodson, his domestic partner, while the Powers Committee referred to a friend to whom Kopper had transferred part of his interest. LJM2 later contended in court that Dodson was Kopper’s domestic partner. ^{7 8 2 9}

analysisThe SEC alleged in its October 2002 complaint against Fastow that he and others formed Chewco to buy CalPERS’ JEDI interest so that JEDI could remain off-balance-sheet. Fastow had planned to be Chewco’s general partner and an equity investor but, advised that this would require disclosure, selected Kopper instead; he allegedly controlled Chewco and Kopper in secret and received a share of Chewco’s profits as kickbacks. In its complaint against Kopper the SEC alleged that from December 1997 to December 2000 Kopper received about $1.5 million in Chewco management fees and secretly shared them with Fastow, mainly through checks to members of his family; that in December 1998 Fastow caused Enron to pay Chewco a $400,000 nuisance fee for agreeing to amend JEDI’s partnership agreement, about $67,224 of which went back to him; and that Kopper paid Fastow’s wife, Lea Fastow, about $54,000 as a Chewco administrative assistant. The Powers Committee put Kopper’s Chewco fees for the period at $2 million. Both men settled the SEC’s cases without admitting or denying the allegations. Kopper, who agreed to disgorge and forfeit about $12 million, pleaded guilty in August 2002 to conspiracy to commit wire fraud and money laundering; Fastow pleaded guilty on January 14, 2004 to two counts of conspiracy to commit securities and wire fraud and was sentenced to six years in prison in September 2006. ^{10 11 12 13 5 6 2 4}

analysisAccording to Enron’s November 8, 2001 Form 8-K, Chewco received $433 million of distributions from JEDI between December 1997 and December 2000. In March 2001 Enron bought Chewco’s limited partnership interest in JEDI for $35 million, and in September 2001 it paid Chewco a further $2.6 million under a tax indemnification agreement; Chewco used $26 million to pay down its JEDI loan, and JEDI became a wholly owned Enron subsidiary. The SEC alleged in its complaint against Kopper that, when Enron bought Chewco’s interest and consolidated JEDI, Fastow approved the $35 million price, of which Kopper and his domestic partner received about $3 million, and authorized the $2.6 million tax indemnity payment, which Kopper transferred to an account under his control. Kopper settled that complaint without admitting or denying its allegations, agreeing to disgorge and forfeit about $12 million, and pleaded guilty in August 2002 to conspiracy to commit wire fraud and money laundering. ^{3 5 6 4}

analysisIn its November 8, 2001 Form 8-K Enron concluded that Chewco, a related party, had not met the criteria for an unconsolidated SPE and should have been consolidated from November 1997, and that JEDI, whose non-consolidation depended on Chewco, should also have been consolidated from that date. The restatement line for consolidating JEDI and Chewco reduced net income by $45 million (1997), $107 million (1998), $153 million (1999) and $91 million (2000) and added $711 million (1997), $561 million (1998), $685 million (1999) and $628 million (2000) of debt. The Senate Permanent Subcommittee on Investigations recounted that in mid-October 2001 reports emerged about Enron’s dealings with JEDI and Chewco, a previously undisclosed related company owned and operated by Enron employee Michael Kopper, which because of improper accounting years earlier Enron had to consolidate in 2001 with a $500 million loss; that is a congressional finding, not a judicial one. ^{3 14}

analysisThe SEC alleged in its amended complaint against Jeffrey Skilling that, before Enron’s January 20, 2000 analyst conference, Skilling and others approved Project Greyhawk, a series of transactions between Enron and JEDI, which held Enron stock, that let JEDI’s income rise with Enron’s share price. This allowed Enron to recognize, through its JEDI partnership interest, about $85 million of earnings from a stock increase that the SEC attributed to a false and misleading broadband presentation at the conference. Skilling filed a statement of non-opposition to the SEC’s motion for summary judgment in the civil case; during his criminal trial the defendants maintained, according to a February 2006 press report, that there had been no fraud at Enron. In December 2015 the SEC obtained summary judgment concluding its civil case: the court found Skilling liable on each claim in the SEC’s complaint on the basis of his criminal convictions and his non-opposition, enjoined him and barred him from serving as an officer or director of a public company. ^{1 2 3}

analysisThe SEC alleged that in early 1997 Enron needed to divest windmill farms to keep regulatory benefits, as it was acquiring Portland General Electric, but wanted to retain control. Fastow allegedly chose nominee investors for the RADR entities that bought the farms and funded them through a secret personal loan to Kopper, who lent to the nominees. The SEC alleged that the entities generated about $2.7 million of unlawful profits from August 1997 to July 2000 and about $1.8 million more when Enron repurchased the farms in July 2000, and part reached Fastow, including as annual $10,000 gifts to his family members. Fastow settled the SEC action without admitting or denying the allegations; Kopper, charged by the SEC over the same scheme, also settled without admitting or denying and, according to the Deputy Attorney General, accepted responsibility for his role when he pleaded guilty. Fastow pleaded guilty on January 14, 2004 to two counts of conspiracy to commit securities and wire fraud and was sentenced to six years in prison on September 26, 2006. ^{1 2 3 4 5 6 7}

analysisIn her plea agreement announced on January 14, 2004, Lea W. Fastow, a former Enron assistant treasurer and Andrew Fastow’s wife, admitted that from December 1997 through 2000 she failed to report as income $204,444.34 that her family received from the Enron special purpose entity RADR, knowing the money came from RADR and that her husband had been prohibited from investing in it. The payments were disguised as gifts, mostly by checks of $10,000 or less. She agreed to plead guilty to filing a false joint tax return for 2000; a July 2005 bankruptcy court opinion recorded that she had pleaded guilty and served her sentence. ^{3 8}

analysisThe JCT staff and the Senate Subcommittee described the Raptors as four Enron-LJM2 structures begun in mid-2000: Raptor I, formed in April 2000 with an SPE named Talon I, LLC, Raptor II in June and Raptor IV in August 2000, while Raptor III hedged Enron’s investment in The New Power Company. LJM2 put $30 million into the SPEs as purported independent equity (in three of the four, per the JCT staff; in each, per the Senate report), and, as the JCT staff reported, Enron assured LJM2 that it would recoup this plus $10 million within six months. Enron’s November 8, 2001 Form 8-K stated that Raptors I, II and IV had been capitalized with Enron stock and derivatives that could require future delivery of Enron stock, and Raptor III with an interest in warrants for New Power stock. The Raptors hedged losses on Enron investments of $501 million in 2000 and $453 million in the first nine months of 2001, and in the third quarter of 2001 Enron bought LJM2’s equity in the four Raptor SPEs for $35 million. ^{1 2 3}

analysisPleading guilty on September 10, 2003, former Treasurer Ben Glisan admitted that he and others deliberately structured Talon (Raptor 1), created in spring 2000, to appear to comply with, but in fact violate, accounting rules, and that they knew Talon was not properly off-balance sheet because Enron had agreed to return the $30 million outside equity supplied by LJM, controlled by Fastow and Kopper, plus a profit, $41 million in all, before Talon began operating. According to the Justice Department’s announcement of the plea, Enron paid through a put option that had no business purpose, and Talon served as the prototype for Raptors 2, 3 and 4, whose insolvency in fall 2001 played a substantial part in Enron’s collapse. Glisan was sentenced the same day to 60 months in prison. The SEC’s complaint against Fastow, as summarized at his January 2004 settlement, alleged that LJM2’s $30 million, the purported 3 percent outside equity, was not at risk because of an undisclosed side deal for Enron to return it plus an $11 million guaranteed return before any hedging, paid through a $41 million put, and that in September 2000 Fastow and others used Raptor I for a fraudulent hedge of Enron’s Avici Systems shares, backdating documents to early August 2000, when Avici stock was at its all-time high. Fastow settled without admitting or denying these allegations, pleaded guilty to two conspiracy counts on January 14, 2004, and was sentenced to six years in prison in 2006. ^{4 5 6 7 8}

analysisThe Powers Committee and the JCT staff reported that in the last two quarters of 2000 Enron recognized about $500 million of revenue on derivative transactions with the Raptor entities, offsetting losses on merchant investments, and $532 million of pre-tax earnings including net interest income, against total reported pre-tax earnings of $650 million for those quarters, so that Raptor earnings made up more than 80 percent of the total on the Powers Committee’s account and about 80 percent on the JCT staff’s. The Powers Committee estimated, relying on its accounting advisers, that such hedges inflated reported earnings from the third quarter of 2000 to the third quarter of 2001 by almost $1 billion. These are findings of the two bodies, not judicial findings. ^{1 9}

analysisThe Powers Committee found that by late March 2001 two Raptor SPEs lacked the credit capacity to pay Enron on their hedges, which would have required a pre-tax charge of more than $500 million. Instead Enron restructured the vehicles just before quarter-end, transferring more than $800 million of contracts to receive its own stock, a step apparently not disclosed to or authorized by the Board and inconsistent with accounting rules. The committee added that, if other employees’ accounts were accurate, Jeffrey Skilling approved the transaction and withheld information about it from the Board; Skilling denied their account. These are a board committee’s conclusions, not a court finding. According to the Committee, in September 2001 Andersen required Enron to reverse the accounting for the additional equity recorded in connection with the restructuring, which Enron’s internal accountants said Andersen had approved and Andersen apparently disputed; the reversal led to the $1.2 billion reduction of shareholders’ equity. ⁹

analysisIn its report of July 8, 2002 the Senate Permanent Subcommittee on Investigations quoted Enron’s Form 10-Q as stating that first-quarter 2001 transactions with the Raptor SPEs, together with a 2000 transaction, obligated Enron to deliver up to 30 million shares of its common stock to the Raptors in March 2005. It also cited an April 2001 chart shown to the Finance Committee indicating that if Enron’s stock fell to $40 and the SPEs’ own assets to zero, Enron would have to produce about 35 million shares for Raptors I, II and IV. Enron’s directors denied knowing about the March 2001 restructuring that placed additional Enron shares at risk in the Raptor hedges, although the April 2001 chart prepared for the Finance Committee referred to it. That is a congressional finding, not a judicial one. ²

analysisThe Raptors were terminated in September 2001. The Powers Committee reported that this led to Enron’s October 16, 2001 announcement of a $544 million after-tax charge against earnings, which Enron described as covering losses on certain investments and the early termination of structured finance arrangements with LJM2, together with a $1.2 billion reduction of shareholders’ equity. Enron’s November 2001 Form 8-K recorded a $711 million pre-tax charge in 2001 related to terminating the Raptor SPEs, and the Senate Subcommittee cited a $710 million charge to earnings, without stating its basis, and called the Raptors the accounting gimmick that finally brought down all of Enron; the three figures are on different bases. The 8-K explained that the $1.2 billion equity reduction mainly corrected an accounting error: Enron had issued common stock to the Raptors in exchange for notes receivable and recorded the notes as assets, overstating notes receivable and equity by about $172 million in 2000 and by a further $828 million in the first quarter of 2001. On buying LJM2’s Raptor interests, Enron recorded the $1.2 billion reduction, including $200 million for the excess of the fair value of contracts deliverable over the recorded notes. ^{9 3 2}

analysisIn its report of July 8, 2002 the Senate Permanent Subcommittee on Investigations stated that in December 1997 Enron’s Board approved Whitewing, to be owned 50 percent by Enron and 50 percent by Nighthawk, a new SPE for outside investors. Enron contributed $500 million in cash and Enron stock (later $560 million), matched by $500 million in cash from Nighthawk investors, most of it borrowed from a Citibank-related entity, and the Board approved $1 billion of Enron convertible preferred shares to be sold to Whitewing. As Whitewing was then consolidated, Enron could use the $500 million without showing new debt. The bankruptcy examiner Neal Batson found that Nighthawk, a year-end 1997 minority interest transaction, raised $500 million for Enron, and that a senior Citigroup accountant who evaluated it before closing concluded that, because the minority investor’s equity was not at risk, Enron would have to consolidate the investor entity and present the $500 million as debt rather than as a minority interest. Citigroup, which designed the structure with the rating agencies to obtain equity credit, knew that minority-interest treatment was critical, the examiner said. These are congressional and examiner’s findings, not court judgments. ^{1 2}

analysisAccording to the Senate Permanent Subcommittee on Investigations, in September 1999 Enron’s Board approved restructuring Whitewing as an unconsolidated affiliate that could be removed from Enron’s books and established the Osprey Trust to invest in it, authorizing Osprey to issue $1.4 billion of debt instruments that could be secured by a second series of Enron preferred shares. The instruments were sold to investors as bonds paying 8 percent, collateralized with Enron stock, and Whitewing used the funds to buy Enron assets; the Subcommittee summarized this as moving Whitewing off the books while guaranteeing its debt with Enron stock. Enron’s November 8, 2001 Form 8-K described the Osprey Trust as beneficially owned by a number of financial institutions and as a limited partner in Whitewing Associates, L.P., an unconsolidated Enron affiliate in which Enron was the other partner, and stated that Chewco bought a $15 million equity interest in Osprey Trust from LJM1 in December 1999 and that LJM2 held $32.5 million of equity in Osprey Trust. After Enron’s December 2001 bankruptcy the Enron stock pledged as collateral for Whitewing’s debt lost its value; the Subcommittee reported that Whitewing had made no payments to its debtholders since July 2001 and that the debtholders had not yet taken legal action to collect. ^{1 3 4}

analysisIn its July 2002 report the Senate Permanent Subcommittee on Investigations found that Whitewing was established by Enron, run by Enron personnel and dealt exclusively with Enron. From late 1999 until 2001 Enron pledged preferred stock and promissory notes valued at nearly $2.5 billion as collateral for Whitewing debt, and in at least 11 transactions from 1999 through 2001 Whitewing bought at least $2 billion of Enron assets under Enron’s asset light strategy of moving lower-return assets into unconsolidated affiliates it effectively controlled. The Board, the Subcommittee said, was fully aware of this off-the-books use, and no director claimed that Enron or Andersen personnel had misled or misinformed the Board about Whitewing in any way; these are congressional findings, not judicial ones. Enron’s 2000 Form 10-K reported sales of approximately $632 million of merchant investments and other assets to Whitewing in 2000 and $192 million in 1999, with no gains or losses recognized. It also disclosed that the Series A preferred shares held by Whitewing had been exchanged in 1999 for 250,000 shares of Enron Series B preferred stock with a liquidation value of $1.0 billion at the end of 2000, and that under a Share Settlement Agreement Enron could have to deliver additional shares if the market price fell below a strike price, raised in 2000 from $28 to $48.55 per share. ^{1 5}

analysisThe bankruptcy examiner’s final report of November 4, 2003 classed Whitewing as a share trust transaction: an off-balance-sheet financing structure in which an issuing entity sold notes and equity certificates in the institutional private placement market and used the proceeds partly to buy or refinance assets owned by Enron or its affiliates, with repayment supported by Enron stock and ultimately by Enron’s promise to pay. Enron’s November 19, 2001 presentation to its banks, as cited by the examiner, put share-trust debt at $3.352 billion as of September 30, 2001. In its July 2002 report the Senate Permanent Subcommittee on Investigations described Whitewing’s status as unclear: although Whitewing had not declared bankruptcy, Subcommittee staff were told that it had made no payments to its debtholders since July 2001, a report the Subcommittee did not verify. The Subcommittee also identified Condor, the vehicle whose unwinding an employee’s August 2001 letter to Kenneth Lay warned would require Enron to issue stock, as Whitewing and the Osprey debt certificates. ^{6 1}

analysisThe bankruptcy examiner Neal Batson, in his third interim report of June 30, 2003, cited an October 23, 2000 email by an officer of the Canadian Imperial Bank of Commerce (CIBC), written in connection with the November 2000 restructuring of the Hawaii structure, reporting that Fastow was very aware of CIBC’s structured equity commitments and, while unable to guarantee repayment, fully anticipated it, and a CIBC credit application describing an undocumented understanding with the CFO. The Justice Department stated on December 22, 2003 that CIBC obtained such promises from Enron’s senior management for its 3 percent equity in Hawaii 125-0, oral side deals not disclosed to Enron’s auditors. This is evidence cited by the examiner and a factual statement summarized in a Justice Department release, not a court finding. Under its December 2003 agreement with the Justice Department, CIBC accepted responsibility for the criminal conduct of its employees in its structured finance transactions with Enron. ^{1 2}

analysisAccording to the JCT staff, Enron’s Official Committee of Unsecured Creditors moved in Enron’s Chapter 11 case (No. 01-16034) for documents and testimony regarding 52 of Enron’s off-balance-sheet affiliates. The list included Whitewing Associates, LJM Cayman, LJM2 Co-Investment and related LJM entities such as LJM Swap Sub and Southampton Place, Chewco, JEDI, Raptors I to IV, Osprey Trust and Hawaii 125-0. ¹