December 12, 2002
They knew

There's a trifecta of Enron-related stories in the Chron today. In the first, we see a law firm's memo written in October, 2000, where Enron was told that its strategies to manipulate the California energy market were illegal. What did they do? They kept on doing what they were doing anyway.

An Oct. 30, 2000, memo written by an outside law firm detailed the charges Enron and its employees could face. One was wire fraud, a charge that Timothy Belden, former chief trader for Enron Power Marketing in Portland, Ore., pleaded guilty to in October. He is now cooperating with prosecutors.

"If Enron is found to have engaged in deceptive or fraudulent practices, there is also the risk of other criminal legal theories such as wire fraud, RICO (racketeering statute), fraud involving markets and fictitious commodity transactions," the memo reads in part. "In addition, depending upon the conduct, there may be the potential for criminal charges prosecuted against both individuals and the company."

When they get around to the made-for-TV movie about this, I suggest renaming the memo's author "Cassandra".

"According to the lawyers, once the memo was written, the traders were instructed not to use the strategies," said Christian Schreiber, investigator for the California Senate committee investigating market abuse during the energy crisis. "We believe it continued."

He said an analysis of power trades has shown that the strategies were used until the FERC imposed a price cap on energy sales in June 2001 -- at least six months after traders were supposedly told to stop using them.

And Belden, when he entered his plea, stated that the practices were used in 2001.

Robert McCullough, managing partner of McCullough Research, said his analysis shows that Enron traders continued to use some of the strategies into 2001, but were forced to discontinue others because of the changes in the way regulators scheduled power transmissions.

"Fat Boy probably lasted to the bitter end," McCullough said. In that maneuver, traders would schedule more power for transmission the next day than its customers would need, then sell the unused power at favorable rates when demand exceeded supply.

Erik Saltmarsh, acting executive director of the state Electricity Oversight Board, said his staff's analysis of electricity movement in 2001 also indicated that Enron continued to use the practices long after the warning memo was written.

It's funny how all this is finally coming to light now, since some people were writing about it while it was happening. Of course, they were just dangerous cranks who don't understand the Genius of Capitalism.

Schreiber said the memo outlining the possible criminal charges was sent to Enron executives. "It was probably seen by the general counsel and probably some of the Enron board members," Schreiber said.

Neil Egelston, a Washington attorney who represents several former board members, said the board was not shown the Oct. 30, 2000, memo.

"To the contrary, the board was informed by Enron management at several meetings that Enron's conduct in California was proper," Egelston said.

There's the real meat. What did the board know, and when did they know it? Were they complicit, or sufficiently removed from the action that they could be easily and badly duped? If they were dupes, why weren't they in a better position to know? Wasn't that their job to know? The same questions can be asked of bank officials, as Story Number Two notes.

Finally, we have this little tale of high-stakes financial crapshooting:

Enron made the hugely profitable bets -- including one that resulted in a $485 million gain on a single day in December 2000 -- at a time when federal and state investigators say the Houston company was conspiring with other energy trading companies to manipulate power and natural gas prices in the Western states.

Indeed, Enron's standing as the nation's biggest energy trader may have bolstered its ability to profit on bets on the direction of prices. While it is unclear whether Enron could singlehandedly move markets with its trades, several Enron trading officials said that to justify their risk-taking, they told the company's executives and directors that, like a casino, Enron had a "house advantage" in the energy markets.

The result of the speculation, the records show, was one of the most stunning runs ever for a corporate trading operation -- some $7 billion in net trading profits for Enron during a power crisis that wreaked havoc on consumers in 2000 and 2001 and forced rolling blackouts in some parts of California. That tally included days with immense trading losses, including a $550 million reversal just a week after the $485 million gain.

There's too much in this article to quote. Read it and weep.

Posted by Charles Kuffner on December 12, 2002 to Enronarama | TrackBack