the CAMP ENRON Report

... gateway to the next Progressive Era?

Some say it's nothing but a train wreck ... roll in the big cranes, clear the track, see what the crew's been smoking. If I thought so, I'd not be writing this ... and if they thought so, they'd not be drumming so hard.

For a brief orientation, see this
Welcome to Camp Enron

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Camp Enron Archives
01/01/2002 - 02/01/2002 02/01/2002 - 03/01/2002 03/01/2002 - 04/01/2002 04/01/2002 - 05/01/2002 05/01/2002 - 06/01/2002 06/01/2002 - 07/01/2002 07/01/2002 - 08/01/2002 08/01/2002 - 09/01/2002 06/01/2003 - 07/01/2003

(2) All "major" articles of older material have now been imported, some with updates worth perusing. We'll keep it all on the main page for a while, will add a few loose pieces of history, will trim the main page and index the archives for convenience later.


free agent, loose cannon, pointy stick ... taking an imposing analytic toolkit out of the box, over the wall and into the street ... with callous disregard for accepted wisdom and standard English

reading the tea leaves from original angles, we've led with uncannily prescient takes on the federal surplus, the dotcom crash, the "Energy Crisis", the Afghan campaign, the federal deficit.

More where those came from ... stay tuned.

For brief orientation, see this
Welcome to CP

... gateway to the next Progressive Era?

For a brief orientation, see this
Welcome to Camp Enron

Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Thursday, May 23, 2002

--- At Least One Happy Ending ... NEPCO Lives! ---

We've been tracking the misfortunes of NEPCO, a sixty-year-old locally-HQ'ed international powerplant construction firm, bought up by Enron a few years back, and soon caught up in the backwash of Enron's collapse. Owned through a chain of subsidiaries, NEPCO was not included in the Enron bankruptcy case ... but their outstanding cash balance -- including customer deposits on mega-projects -- was suddenly sucked into the Enron mother ship.

Good news. NEPCO will go through its own Chapter 11 to wash the Enron entanglements out of its hair, and the surviving assets acquired by a Canadian competitor, SNC-Lavalin. Staff, management, and projects around the globe are saved! (Seattle Times)

In other regional developments, NW Natural has dropped plans to acquire Enron's Oregon based utility PGE, citing too many complications. Before Enron went "asset light", PGE was the jewel in the Enron crown, and its trading operations inspired Enron's trading platform strategy.

There has been some talk of converting PGE to cooperative public ownership.

--- Enron Bankruptcy Examiner Appointed ---

US Bankruptcy Judge Gonzalez is expected to confirm appointment of veteran bankruptcy examiner Neal Batson. This is one key to untangling the tangled web of Enron finances and the roles played by banks, brokers and law firms. Per the Chron:
He will also have power to waive Enron's attorney-client privilege to interview law firms, including Vinson & Elkins, which advised the company when it was creating some of its partnerships.

Creditors not on the committee wanted an independent examiner, largely because Enron's two biggest creditors, J.P. Morgan Chase and Citibank, were prominent members of the committee. They have been linked to some of the company's complicated financial transactions.
Mr. Batson has his work cut out for him.

--- States Divvy Up Merrill Lynch Follow-Up ---

Per WSJ, at least nine states -- a Who's Who of crusading prosecutors -- will share the second wave of Wall Street investigations and negotiations, following NY Attorney General Eliot Spitzer's settlement with Merrill Lynch over secutiry analyst misconduct. NY, MA, CT, TX, AL, NJ, CA, WA, UT ... the targeted firms have been divided. My state of Washington gets Piper Jaffray, Utah goes after Goldman Sachs, Texas and Alabama join forces to chase JP Morgan Chase, and so on.

Among other things, this is a vote of "no confidence" in the SEC and the feds in general. It's also training camp for a network of young, reform-minded public-interest attorneys. By the time the Enron meta-scandal matures (20 or 30 years from now), some of these young pups will end up as lead dogs on the national scene ... just as no-name staffers from the Watergate inquiry and the Warren Commission grew up to be household names of today.

--- Closing the Barn Door ... and Slamming It Twice! ---

State Board of Public Accountancy moves to revoke Andersen's license to practice in Texas, and asks for $1M penalties.

They won't get $1M, because Andersen won't have $1M, but they will get a place in line with many other creditors. They won't deter Andersen from anything anymore. Given the circumstances, they probably won't deter anyone else either. State Boards are notorious lapdogs, occasionally writing a stern letter to some small-time finagler.

This move strikes me as putting a load of cheap shot into somebody else's bird that's already hit the ground, and trying to cover some bureaucratic posteriors from charges of inaction.

Wednesday, May 22, 2002

--- Enron Tax Chief Spills Guts to WaPo Reporter ---

Washington Post has a killer piece on Enron's use of one-shot tax gimmickry to generate a substantial fraction of reported profits. (30% in 2000, nearly $1B overall.)

Former general tax counsel Robert J. Hermann disclosed a series of creative tax schemes, most involving deals with offsheet and offshore entities.
... more and more of the company's reported profits came from one-time tax transactions ... The gap between what he and fellow managers thought they could reasonably deliver and the profit targets top executives demanded was known inside Enron as "the stretch." ...

"When the number got up to $300 million [last year] I said, 'Rick, this is going to have to stop,' " Hermann said. " 'We have to come up with a way to get this through earnings -- through regular business.' " ...

Lawyers for the company and its creditors are now left trying to sort out which assets Enron still owns and which may be claimed by outside participants in the tax transactions. ...

"We took advantage of what the rules are. If you know the rules you don't have to break the rules, you just use them. That's what lawyers and accountants do."
Well worth the long read ... extra grist for the reform mill ... and extra grit under the contact lenses of business-as-usual lobbyists.

--- Compliance? Or Code-Words? ---

From the Chron
Patricia Grutzmacher, a senior manager on the Enron account, described what she called an "unusual" conversation she had with Tom Bauer, a senior Andersen partner.

"He told me that if he ever talked to us about getting rid of documents that it would always be along the lines of being in compliance with the firm's retention policy."
And a nudge is as good as a wink, eh? Eh?

Mr. Bauer invoked his 5th Amendment rights earlier in the week, and Grutzmacher could not be reached for further comment.

Tuesday, May 21, 2002

--- Spitzer Settles with Merrill Lynch ---

NY Attorney General Eliot Spitzer has reached a settlement in the matter of corrupt recommendations by Merrill Lynch & Co. security analysts.

The agreement calls for reforms, apologies, and penalties.

Reforms amount to no longer doing business as usual (analysts touted stocks they knew were crap, paid out of the firm's investment banking gains on those same stocks). An expert pretends to offer a service to the buyer, while actually shilling for the seller ... that's blatantly corrupt.

Penalty is $100M, divided among the several states. Chump change for a giant like ML.

Apology and contrition is crafted to avoid admitting guilt in any form that could be used against them in court. If ML explicitly admitted doing what everyone now knows they were doing, they'd become a plaintiff's pincushion and possibly die the Death of a Thousand Suits.

Spitzer could have gone for criminal charges. He could have gone for much harsher penalties. He could have held out for more damaging admissions of guilt. He didn't. Why?

In effect, Merrill got mercy and probation ... a slap on the wrist rather than amputation of the thieving hand. Injured investors got left out in the cold. Too big too fail? Maybe. And too vulnerable. Crushing Merrill "Bullish on BS" Lynch & Co. would have devastating knock-on effects, so this is probably the lesser-of-evils approach. Leave the landmark standing on Wall Street, but usher them into a 12-step recovery program.

I am curious why the penalty was so small -- $1B would be a better attention-getter -- and why the formal compliance monitoring period is only one year.

This is ML's equivalent of Andersen's Waste Management settlement. Andersen helped Waste cook the books, got caught, paid a fine and agreed to safeguards. Then they pushed the marketing envelope, laughed off the safeguards, and a couple years later they got caught in flagrante delicto with Enron. (In truth, they never stopped screwing around, and it wasn't just Enron.) Knowing the next step was no mere slap on the wrist, they hurried to destroy documents in the hours ahead of receiving the formal notice of investigation, and they earned the corporate Death Penalty.

Likewise for Merrill (and other brokerage giants) in years to come. Everybody is now on notice, we know somebody will screw up eventually, and next time we'll have to kill them as an example to the others ... we just hope and pray it's not one of the biggies.

Problem is, nobody has yet figured out how to make markets for security analysis work in their own right (information markets are failure-prone). The need for analysis hasn't gone away. The temptations haven't gone away. Investor mistrust doesn't go away (ML merely agrees to front stronger caveat emptor language) and all this renders the capital markets less efficient, and that invisibly whacks the global economy.

The underlying problem remains open to inventive solution and fundamental reform.

Wednesday, May 15, 2002

--- Enron Trading Game Scorecard ---

American Public Power Association's Public Power Weekly posts a synopsis of the Enron attorneys memos outlining a rough dozen market-manipulation schemes. Their article links to FERC's website where the original documents are imaged. Because FERC carries the documents in facsimile form, because the trading scheme descriptions are abbreviated and arcane, and because the lawyers' renditions of traders' practices are somewhat garbled, I recommend the APPA version.

The text may nevertheless prove challenging except to those deeply-versed in the power game, the trading game, and the particulars of the California energy market.

Wednesday, May 08, 2002

--- Minimal Disclosure is Out, Smoking Guns are In ---

Listen up, campers! Some pack of jokers left their smoking guns all over the parade grounds ... and try to don't blame it all on last session's campers! Let's get out there and clean up this mess!

Phoenix Lodge! Andersen's Baptist Foundation of Arizona trial scattered smoking gun documents all along its short unhappy trajectory. Until they bailed out (a week into trial) with a $217M settlement (again), Andersen's defense amounted to "with all this evidence of fraud, everybody should have known the financial statements were bogus ... how can you blame us?". ( MSNBC )

Alamo Lodge! Judge Harmon clears DOJ to introduce Andersen's past bad behavior as evidence of motive to avoid detection of further wrongdoing ... a virtual museum of smoking guns from past screwups and slap-on-the-wrist settlements.

Stamford Lodge! ("Stamford Lodge"? What kinda wimpy camp name is that?) Smoking guns are turning up all around Xerox/KPMG's little misrepresentation "problem" ... design documents for hastily contrived schemes to boost stated results without actually improving business results. The question of the day is whether KPMG was knowingly, actively complicit ... or an unknowing dupe ... or a spineless enabler ... or (KPMG's angle) an outgunned tragic hero.

There's another smoking gun in that drama. We know who was in the room, but we don't know who's pulling whose trigger. SEC Chair Pitt and KPMG CEO O'Kelly met briefly 2002-04-26 ... that much is agreed. O'Kelly claims he lobbied Pitt on behalf of KPMG generally and the Xerox audit case in particular. Pitt vigorously denies any such discussion. What's the big deal? KPMG is Pitt's former client, and any such communication -- with or without material effect -- would be a gross breach of SEC ethics. Neither party seems inclined to back down from their version, or to muddle the issue with mumbles about misunderstandings. Pitt is already under fire for multiple unchaperoned meetings with listed conflicted contacts. He should quit now, if only for appearance reasons. [UPDATE:Today's WSJ lead editorial criticizes Pitt on both action and appearance, projects no hope his situation will improve, zings the White House for standing behind him, and all but demands his resignation. Remember, you heard it here 2002-01-18. ]

Manhattan Lodge! Smoking guns are tumbling out of Wall Street briefcases and hard drives, detailing security analysts' explicit contractual conflict of interest (compensation based directly on investment banking fees). This follows on NY A.G. Spitzer's disclosure of Merrill's smoking POS ("piece of shit") memos deprecating in private the same stocks they rated "buy, buy, buy" in public. NYT's Gretchen Morgenson notes a number of firms are under NASDR Wells notices ("please show why we should not take enforcement action") regarding destruction of documents whose retention is required by law.

The immediate argument will be over remedies and penalties ... structural, civil or criminal ... and who will take credit and control of roasting Wall Street Weenies over the bonfire Spitzer seems to have stoked. [Much news today, more later.]

Alamo Lodge, again! Smoking guns are starting to percolate out of the Enron "upstream" scandal ... the scandal before our beloved "household name" Enron scandal ... the scandal of deregulated power markets contrived and manipulated to rake tens of billions of dollars out of the western states. FERC released Enron trading scheme design documents (provided to FERC by ENE attorney Bob Bennett, who suggests he could have held them as privileged, and notes "not our problem, we sold the trading unit to UBS Warburg").

Various market gaming schemes ("Death Star", "Get Shorty", etc., etc., and the aptly named "Ricochet") were designed to get Enron (or surrogates) paid for moving electrons and relieving congestion, without moving any electrons or relieving any congestion (in some cases, creating congestion) ... to buy California power, move it out of state (creating an energy deficit), and sell it back into California at crisis prices ... and so on. "Death Star", huh? Hey ... watch where you point that thing!

No surprise to camp regulars ... We've been calling this shot for more than a year, and in some detail. As previously suggested, these schemes could either be exposed by painstaking forensic modeling of millions of trading records (which would take years, and it's not clear any agency had either the will or the ways and means) ... or by self-serving leakage of internal documents and turncoat testimony. "I'll take Door Number Two!" Needless to say, more to follow.

Potomac Lodge! Deregulation still has legs, and still scuttles forward. PUHCA repeal is wending its way through Congress, tucked away in the Energy Bill. The Cantwell Amendment (which would have preserved an express public duty to maintain orderly, transparent, competitive, "just and reasonable" market conditions) failed in the Senate. Given recent developments, and given the possibility of irreconcilable differences between House and Senate versions, and given House Energy & Commerce Chair Rep. Billy Tauzin's wont for populist/consumerist grandstanding, maybe some comparable provision will creep back into the bill ... but it needs to flip about 10 votes in the Senate and probably a lot more in the House.

FERC persistently pooh-poohed talk of "market manipulation", and only reluctantly opened the Section 206 investigation -- to which Bennett responded -- at Cantwell's steely insistence. Now FERC wants to turn up the heat. So does GWB.

Questions abound. Were these schemes merely schemed, but not implemented? (ha!) Who else played along? Was market-gaming collusion tacit, or overt? Who will cover tens of billions of dollars in western states' losses? Did FERC merely lie down on the job ... or did it lie down, roll over, sit up and beg? Are there smoking gun documents in FERC or DOE archives? Can the West sue Uncle Sam? Enron's got no money, and some humongous civil claims are already SOL ("Statute Of Limitation'd") into sour grapes land by FERC's previous inaction, or quashed by court decisions rooted in marketarian thinking.

Austin Lodge! Well under most observers' radar, Enron acknowledged it is one of six firms under investigation by the Texas PUC for manipulation of Texas energy markets. Texas began operating under its own power dereg regime this year, following last summers' pilot program.

Alamo Lodge, get back in here! In the downstream scandal, WSJ cites year-old Enron documents that expose billions in knowing overvaluation of offshore assets ... some of them used to collateralize even more off-sheet investment schemes.

Bermuda Lodge! Tropical beachcombers report smoking guns turning up at low tide. Keep an eye on this one ... the same financial hidey-holes (defended proudly by last year's politicians, and fewer of this year's) may have sheltered upperbracket individual tax evasion, corporate tax dodges, corporate accounting duplicity, drug cartel operations and terrorist treasuries.

Manhattan Lodge! Today is D-Day for 2nd and 3rd-hand defendants in Enron bankruptcy proceedings. They (a slew of big name banks, brokerages, law firms, accounting firms) either file to Dismiss claims against them, or enter Discovery ... that's the phase where you wish you'd stamped "UNAPPROVED - DRAFT ONLY" across the face of every physical and electronic document in the whole house.

Sac'to Lodge! There's a sheaf of documents detailing an aggressive, coordinated arm-twisting campaign directed at Enron by state elected officials at the height of the California energy crisis. No, not a campaign threatening legislation or litigation to get Enron to let loose more electrons ... rather a campaign to get Enron exec's to let loose more dollars to help California Republicans win more elections.
"The event in Houston was not a fund-raiser per se," said GOP spokesman Rob Stutzman, "(but) we want to be clear that the hope was that the companies would contribute money." ( the Chron )
Austin Lodge! Quick, everybody, take a look at this! Former Governor Bush (R-TX) gives us a smoking gun safety demonstration, in his handling of an Enron request (which he declined, BTW).
"Someone (Ofelia? Dale?) said the Gov is no fan of Ex-Im but didn't want to put on paper," the note said, referring to Bush administrative aides Ofelia Vanden Bosch and Dale Laine. "So I think he had Joe handle by phone." ( the Chron )
Potomac Lodge! Speaking of smoking guns, the Crusader 40-ton howitzer project looks dead, while ex-Enron Army Secy. Thomas White is still in the saddle. White dodged a big bullet associated with someone circulating pro-Crusader talking points with Army fingerprints on them, against Defense Secy Rumsfeld's express intent to kill the program.

At Camp Enron, the Culture of Minimal Disclosure is now officially passe. Fun while it lasted, but now it's confession time ... a race to see who comes out fastest with the mostest, and spins it the bestest, and maybe gets in under the wire for a "everybody did it, and we're all really sorry, and we'll never, ever do it again" probationary administrative amnesty program. After that ... next camper to miss a bed check gets hard time!

Speaking of which ... Playboy's "Women of Enron" issue is slated to hit the stands 2002-07-01. Yes, Playgirl has their own project in the works ... and I'm sure we're all dying to know what those Geniuses of Capitalism have had in their defense briefs all this time.

Tuesday, May 07, 2002

--- Andersen's Day in Court ---

OK, you've got pedophile priest extradition in San Diego and arraignment in Massachusetts, B-list Hollywood celeb murder hearings in L.A., Kennedy kin murder proceeding in Connecticut, American Taliban dancing-with-terrorists trial in Northern Virginia, car chases, an iteinerant pipe-bomber, and ... oh, yeah, that dry-as-dust technical document destruction case in Houston. Houston is hot, muggy, buggy, and folks down there are kinda cranky for some reason. Kudos to CNN for assigning a first-rate sketch artist.

Even if the Andersen trial produces a Perry Mason Moment, it'll demand too much context to cut it as a good BREAKING NEWS bulletin. It's only a preface to bigger drama anyway ... clearing ground, defoliating the underbrush, peeling layers off the onion starting with the thinnest skins ... systematically removing incentives and/or cover for one or another Culture of Minimal Disclosure.

Lead defense counsel Hardin will live up to his reputation for courtroom theatrics. (In jury selection: "Have YOU ever deleted an e-mail? Does that make YOU a criminal?"). DOJ can play it lower-key, methodically flogging Andersen's corporate corpse. OOPS, it's not quite dead yet ... don't worry, it will be.

The less there is left of Andersen, the less motive there is for anybody to cover anybody else's back. There's not much left of Andersen, BUT ... there is the untested shield of the LLP -- the Limited Liability Partnership -- invented a decade ago as compartmentalized damage control for cases much like this. LLP's are designed to keep the mother ship from imploding even in the event of a few partners' extraordinary mendacious idiocy (as with departed Big 8'er Laventhol & Horwath).

If the shield stands, billions in personal assets of Andersen partners are safe from Enron victims. (Though junior equity partners who went into debt to buy their seats are still SOL.) The traditional partnership concept is "all for one and one for all"; LLP is more like "every man for himself". Partners share in the hunt, and share in the spoils, but individualize the liability.

There is vice in breaking the shield -- large partnerships are large, unstable tort magnets. There is vice in maintaining the shield -- it's too tempting to benefit by doing great harm, and escaping the consequences by jettisoning only peers who get caught (leaving the injured plaintiffs SOL). The LLP shield has never been effectively tested, and by rights it should be tested first at the vice-o-meter's red line. Andersen's not there yet, but it's getting there fast. (That's all down the road. The current criminal trial for obstruction of justice against the firm would only reinforce the predicates for subsequent civil action. An acquittal, on the other hand, would not settle much ... we expect more fundamental criminal proceedings against the firm in months/years to come.)

In other courtroom drama, Andersen settled the Arizona Baptist Foundation case a week into the trial (after pointing accusatory fingers at everyone under the Arizona sun, pleading "everybody knew it as a Ponzi scheme, but nobody told us"), for the originally-negotiated and reneged $217M. That's not a win for anybody ... only a few million stands to be collected before the remains of Andersen are interred in a pauper's grave. (The same held true if Andersen lost at trial ... AZ Baptist investors are out most of $570M either way.)

Monday, May 06, 2002

--- Peregrine Takes Dive; Chickens Come Home to Roost ---

The Peregrine Falcon is a small raptor capable of diving on its prey at up to 273 mph. In urban environments, its diet consists almost entirely of pigeons. (Seattle's Washington Mutual Tower hosts a webcam-equipped breeding ledge, with new hatchlings on view as of May 2.)

In San Diego, Peregrine Systems share price plummeted 60% this morning (following last week's 80% decline), as the E-commerce firm reacted to KPMG's detection of possibly irregularities in revenue recognition (to the tune of $100M in FY 2001 and 2002). Q4 results delayed, CEO and CFO resigned.

KPMG replaced Andersen as PRGN's auditor just last month.