Outside investors in off-balance-sheet partnerships run by former Enron CFO Andrew Fastow may share his fiduciary liability for the energy trading company’s demise. At least, that’s the charge now being leveled by a securities lawyer involved in a lawsuit against Enron.
Stanley Grossman, an attorney at law firm Pomerantz, Haudek, Block, Grossman & Gross, is representing Enron lenders in a suit aimed at the underwriters of an exchangeable note issued by the Houston energy company in January 1999. Nevertheless, Grossman contends that outside investors in the partnerships may bear no less fiduciary responsibility for Enron’s meltdown than Fastow.
To back up his claim, Grossman cites the case of Jackson v. Smith, heard by the U.S. Supreme Court, as well as several recent lower court decisions. Grossman insists that both state and federal courts ruled that “others who knowingly participate with a fiduciary in a breach of trust are liable to the beneficiary for any damage caused thereby.” He adds that the courts held that limited partners are “equally culpable” with the general partner.
Three of the special purpose entities (SPEs) run by Fastow — LJM, Jedi and Chewco — hid Enron’s debt and inflated its income, according to information filed by Enron with the Securities and Exchange Commission. Among the limited partners in LJM: American International Group, AON, Citigroup, Canadian Imperial Bank Corp., Credit Suisse First Boston, Dresdner Bank, General Electric Capital, J.P. Morgan Chase, Lehman Brothers, Morgan Stanley, Merrill Lynch, and Wachovia Bank, according to a report by Smartmoney.com. The site named several smaller institutional investors as well.
Meanwhile, CFO.com has learned that Deutsche Bank was a limited partner in either LJM or Chewco. And Enron itself has disclosed that the powerful California Public Employees Retirement System (Calpers) was an investor in Jedi.
As you recall, last November 8, Enron reduced its shareholder equity by $1.2 billion. At the same time, the company lowered its previously stated earnings for the years 1997 to 2001 by some $600 million. The restatements came after the SEC deemed that Enron’s debt-laden special purpose entities belonged on the energy trader’s balance sheet. The stunning rejigging of Enron’s financials eventually led to the company’s bankruptcy, the largest in U.S. corporate history. As a result of their investments in the partnerships, Grossman contends that these third-party participants may share fiduciary liability with Fastow for Enron’s demise.
The Senate Governmental Affairs Committee’s Permanent Investigations Subcommittee is also said to be looking into the roles played by third-party investors. Until recently, the identity of most of those investors had pretty much been a mystery.
On the other hand, people who were asked to invest in Enron SPEs — but didn’t — have been none too shy about discussing Fastow’s pitch. In an article published by Bloomberg, Danny Bowers, chief investment officer of the Houston Firefighters Relief and Retirement Fund, said the Enron CFO approached him about sinking money into LJM2. Bowers says he declined because of Fastow’s dual role as Enron finance chief and general partner of LJM2. “There was a pretty blatant conflict of interest,” Bowers told Bloomberg. “It was kind of a stinky deal.”