--- title: "Enron’s Rhythms hedge and the Southampton investments" language: en canonical: https://dossiertwist.com/dossiers/enron/rhythms-southampton/ as_of: 2026-10-08 keywords: ["Enron","LJM","Chewco","Raptor","bankruptcy","corporate governance","structured finance","legal outcomes"] --- # Enron’s Rhythms hedge and the Southampton investments **Question.** How did the attempted hedge become a source of insider returns? **Answer.** The Rhythms structure relied largely on Enron stock to support its promised protection. Its unwind paid a vehicle in which employees had obtained interests; separate NatWest bankers later admitted defrauding their employer through a concealed Southampton investment. ## A hedge dependent on Enron’s own shares - Analysis: Enron’s early Rhythms investment appreciated sharply after the IPO, but a lock-up limited its ability to sell. The solution put restricted Enron shares into a structure involving LJM1 and LJM Swap Sub, which wrote a put on the Rhythms holding. SwapCo was the general partner and LJM1 the limited partner. Because the protection depended substantially on Enron stock, a simultaneous fall in both companies’ shares could undermine it. [s-d117] - Attributed: Enron’s $10 million March 1998 investment in Rhythms appreciated sharply after its 1999 IPO, but a lock-up prevented an immediate sale. Enron used LJM1 and LJM Swap Sub to obtain a hedge whose backing largely consisted of Enron’s own shares. [s-d117] - Qualification: The committee concluded that this did not transfer risk like an independent creditworthy counterparty: simultaneous declines in Enron and Rhythms would undermine the promised protection. - Attributed: LJM SwapCo, directed by Fastow, was general partner of LJM Swap Sub; LJM1 was limited partner. The June 1999 structure transferred 3.4 million restricted Enron shares to LJM1 for a $64 million note, then capitalised Swap Sub with 1.6 million of those shares and $3.75 million cash. Swap Sub wrote a put on 5.4 million Rhythms shares. [s-d117] - Qualification: The prose and earlier structure description establish SwapCo as general partner. A reversed general-partner label in a later retained diagram description is not followed. Share quantities refer to the initial pre-split transaction. - Analysis: PwC provided a valuation fairness opinion on the initial exchange. That did not answer every accounting question. Andersen later acknowledged its capital-adequacy assessment was mistaken, and Enron announced retrospective consolidation that reduced its reported 1999 and 2000 income. The committee treated the economic weakness of the hedge and the failure of the outside-capital test as related but distinct issues. [s-d117] - Attributed: PwC supplied a fairness opinion on the initial exchange, but the report questioned Swap Sub’s capital adequacy. Andersen later acknowledged its original 3% assessment had been mistaken; Enron announced retrospective consolidation, reducing 1999 net income by $95 million and 2000 net income by $8 million. [s-d117] - Qualification: A valuation fairness opinion does not certify every accounting or governance issue in the structure. ## The unwind and the employee vehicle - Analysis: In spring 2000 the parties ended the derivatives and returned Enron shares. The $16.7 million net transfer in the March letter reflected offsets against the $30 million negotiated amount. Causey signed for Enron and Fastow for Swap Sub and Southampton. The report found no fairness opinion for this unwind or record of board approval; Causey described a fairness assessment, Lay said he was unaware, and Skilling said he knew the Rhythms position was sold but not the unwind terms. [s-d117] - Attributed: The Rhythms hedge was unwound in spring 2000. The March letter returned 3.1 million post-split Enron shares, terminated the derivatives and provided a $16.7 million net payment to Swap Sub. Causey signed for Enron and Fastow for Swap Sub and Southampton LP. [s-d117] - Qualification: The $16.7 million net transfer is not inconsistent with the $30 million gross negotiated amount; the report sets out offsets for cash, loan principal, interest and dividends. It found no unwind fairness opinion or board approval record. - Response: Causey described stabilising the transaction and assessing fairness to Enron. Lay said he was unaware; Skilling said he knew the Rhythms position had been sold but not the unwind terms. - Analysis: Southampton Place and Southampton LP are separate named vehicles in the documentation. Big Doe was general partner of Southampton Place; employee investors and the Fastow Family Foundation were limited partners. Southampton Place was in turn general partner of Southampton LP, identified as owner of Swap Sub’s limited interests and its general partner. The committee could not reconstruct the acquisition consideration. It did identify very large returns to the foundation, Glisan and Mordaunt, while preserving the employees’ explanations about their understanding of approvals and the investment. [s-d117] - Attributed: The March 2000 Southampton Place partnership had Big Doe as general partner and the Fastow Family Foundation, Glisan, Mordaunt, Lynn, Yaeger Patel and Hinds as limited partners. The unwind documentation identified Southampton LP, whose general partner was Southampton Place, as owner of all Swap Sub limited interests and of its general partner. [s-d117] - Qualification: The committee did not determine how Southampton acquired the interests or what it paid. Southampton Place LP and Southampton LP are retained as separate named vehicles. - Attributed: The committee found documents showing a $4.5 million payment to the Fastow Family Foundation after a $25,000 investment. Glisan and Mordaunt each reported receiving about $1 million after investing $5,800. The inquiry found no required internal approval for those investments. [s-d117] - Qualification: These are different investors’ returns and should not be converted into a total attributed to a single person. - Response: Mordaunt said she believed LJM1 was no longer doing business with Enron and later regarded that judgment as mistaken. Glisan said outside LJM counsel told him the investment was not an Enron related-party transaction. Yaeger Patel’s counsel said she understood it as a bonus with approvals obtained by superiors. ## The bankers’ later admissions concern their own conduct - Analysis: In November 2007, Mulgrew, Darby and Bermingham each pleaded guilty to wire fraud. They admitted secretly investing in Southampton while disposing of an asset for NatWest, concealing a personal interest from their employer. Their agreements called for 37 months each and approximately $7.3 million repayment to Royal Bank of Scotland. The retained announcement reports pleas and agreed terms, rather than a subsequent sentencing hearing. Their admissions do not make NatWest the perpetrator of the fraud against it. [s-d150] - Documented: Gary Mulgrew, Giles Darby and David Bermingham pleaded guilty on 28 November 2007 to one wire-fraud count each. They admitted secretly investing in Southampton while selling an asset for their employer, NatWest. Their plea agreements called for 37 months each and approximately $7.3 million repayment to successor Royal Bank of Scotland. [s-d150] - Qualification: The retained release establishes guilty pleas and agreed sentencing terms, not a later sentencing hearing. Its inconsistent per-person arithmetic is not repeated. The admitted employer deception is not a finding that NatWest itself committed their crime. ## Sources - [s-d117] Company statement source · s-d117 - [s-d150] Regulatory record concerning Enron or an identified participant, US Department of Justice