Partners to the End?

Attorney argues that limited partners in Enron's special purpose entities had fiduciary responsibilities, too. But exactly who were those partners?

According to the Bloomberg story Enron executives also tried to convince officials of the University of Texas endowment fund to invest in a number of the company’s off-balance-sheet partnerships. Officials at the fund declined the offers.

Not all public employee fund managers said no to Fastow, however. In an SEC filing, Enron disclosed that Calpers had been an investor in Jedi, but sold its interest in 1998. The filing also noted that Enron management believed that “a significant number of institutions and other investors that are not related parties” were partners in LJM. But the filing did not identify any of those investors, nor the outside partners in Chewco.

Draft Dodgers?

But a former Enron employee who claims to have helped prepare that SEC filing told CFO.com that General Electric Capital Corp., Deutsche Bank, and Dresdner Bank had been identified in an early draft of the document. The source asserts that the names of those three investors were deleted from the version sent to the commission. That deletion, the ex-employee alleges, was made at the behest of William McLucas. McLucas, a former director of the SEC’s enforcement division, was hired by the Houston-based energy trader on October 31 to help an Enron special board committee comply with an inquiry launched by the commission into the company’s finances. McLucas is now a partner in the Washington, D.C., law firm of Wilmer, Cutler & Pickering. The former employee also claims to have received instructions to destroy the draft of the filing containing the names of the three companies.

McLucas did not return CFO.com’s call on Friday, and no one from GE Cap, Deutsche Bank, or Dresdner Bank would comment about the case. A source close to Calpers, however, reportedly said the pension fund’s investment officers were not aware that Jedi was an affiliate of Enron, or that Fastow was involved.

Some attorneys point out that limited partners could not have knowingly violated their fiduciary responsibility to Enron’s investors — unless they knew a partnership was backed by Enron stock. But the fact is, the SPEs were evaluated by at least one rating agency, and according to an analyst at that agency, the rating specialist took the Enron collateral into account when assessing the partnership.

For his part, Grossman finds it hard to believe that Enron’s third-party investors weren’t aware of Fastow or Enron’s identity. In the case of LJM, Grossman notes, the limited partners had to qualify as sophisticated investors to be eligible to participate in private placements (under federal law, only qualified institutional investors can participate in certain types of private placements). Hence, Grossman argues, they had to know that Fastow was CFO of Enron. And, as qualified institutional buyers, they would be well aware that Fastow was in breach of his fiduciary responsibilities to Enron since he stood to benefit financially from these special purpose entities. Indeed, the Enron CFO ultimately earned more than $30 million from running the SPEs.

Grossman also argues the third-party investors could not have reasonably believed that Fastow could serve both Enron investors and the SPE investors equally well. In addition, he claims the partnership documents pointed out that the limited partners would benefit from Fastow’s position as Enron’s CFO.

Some attorneys contend, however, that limited partners in an off-balance-sheet partnership can’t be liable for fiduciary liability — unless they know that the partnership should have been consolidated. Even then, say these lawyers, the investors’ liability would be limited to their investment. In the case of the Fastow-led partnerships, those investments are likely vapor at this point. Grossman’s argument “sure sounds like a stretch to me,” says Steven Toll, a partner in the law firm of Cohen, Millstein.

But another securities lawyer, Stephan Haimo of Gibson, Dunn & Crutcher, notes that limited partners that exceed their role by acting as promoters of a partnership (or related partnerships) may open themselves up to liability beyond that of a limited partner. “You’d have to prove a vast conspiracy,” says Haimo, “and I don’t see it going that far, because you’re talking about bringing down the entire investment banking community.”

Of course, nobody thought one of the world’s largest and richest corporations would collapse almost overnight — and all due to a change in the company’s accounting practices. In the coming year, concedes Haimo, “we’ll be testing all kinds of legal theories.”

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