Man Without Qualities

Friday, August 23, 2002

An Enron Insider Pleads Guilty II

As noted in a prior post, some of the first reports concerning Mr. Kopper's plea agreement in the Enron case stated that it was unclear whether he would be obligated to cooperate with the prosecutors. Later reports have confirmed that such cooperation is part of his bargain, which is no surprise. What is surprising is that according to the New York Times :

The guilty plea that handed prosecutors their first conviction in the Enron case also raises questions about what executives hoped to accomplish with the complex partnerships at the center of the scandal. Many believe executives were trying to make the company look good by hiding debt and boosting its stock price. But former executive Michael Kopper's plea said that in at least three partnerships he and others tried to skim millions not for the good of the company, but for themselves.

Is the Times reporting that these three partnerships were not intended make Enron "look good by hiding debt and boosting its stock price?" Maybe not. The Times also quotes Duane Windsor, a business ethics professor at Rice University in Houston:

"Within the general corporate scamming to keep up the stock price, there were personal games of enrichment going on -- that's what his confession essentially amounts to."

But is that really consistent with what the Times says above? Professor Windsor is saying that the partnerships served two ends (Enron's and the individuals) - but the Times doesn't seem to be saying that.

What is interesting is that Mr. Kopper's guilty plea is quite clearly based on events entirely unknown to Enron's critics at the time of its bankruptcy filing. That has not stopped those critics from claiming that Mr. Kopper's plea agreement vindicates their original claims. In fact, the facts described in the Kopper plea agreement - even assuming those facts as asserted are completely correct, notwithstanding the coercive manner in which they were obtained - suggest a rogue Mr. Fastow assisted by Mr. Kopper scamming Enron without the knowledge of other officers. If true, that's certainly criminal behavior. But it is also certainly not what Enron's critics have been complaining about these many months.

If the Kopper agreement had not required Mr. Kopper to cooperate and provide meaningful evidence to reduce or eliminate his prison term - a rare kind of plea agreement - the agreement would been more interesting. In that case whatever testimony and information Mr. Kopper provides might not be so self serving and unreliable, qualities that are the inevitable consequences of the agreement's actual coercive format. Of course, without that format Mr. Kopper might not provide any evidence - so the prosecution had a difficult choice, and probably made the right call.

Nor is it obvious that what Mr. Kopper says in connection with his plea agreement is true at this point. Previously, using similar coercive tactics, the Enron task force obtained the confession of David Duncan to the crime of "obstruction of justice." The Andersen jury in the subsequent criminal action refused to agree that Mr. Duncan had committed that crime even with his own confession in evidence. Enron's critics had also pointed to the supposedly massive destruction of documents as a "slam dunk" and "obvious" act of obstruction. The Andersen criminal jury also refused to agree with that. If the same mind set were applied to these developments as Enron's critics routinely employ against that company and its operatives, one would have to be seriously investigating whether the Enron task force has already committed attempted subornation of perjury in its handling of Mr. Duncan. And since then, the heat on them has only gone up.

It is worth keeping in mind that Mr. Kopper cannot reduce his sentence unless he delivers something or someone of note to the prosecutors, and that by his own admission Mr. Kopper is an opportunistic liar. Of course, that doesn't prove that he is lying now - only that he is either lying now or lied previously about the same set of facts. One can be sure that if Mr. Fastow has to stand trial, which appears likely, his jury will be made to keep those facts seriously in mind.

Further, the concealments from Enron that Mr. Kopper alleges do not appear consistent with the conspiracy of senior officers, board members, accountants, investment bankers, and others long posited by Enron's critics. It is worth noting, for example, that the plea agreement entirely avoids matters in which Andersen was involved.

The Information charging Mr. Kopper is worth reading especially to understand that the crimes to which he has confessed concerning Chewco (for example) deal entirely with shenanigans pertaining to a "missing" 1.5% of Chewco's capitalization. That is, under accounting rules Chewco needed to receive 3% of its capital as independent equity contributions, where the scheme in which Mr. Kopper participated placed half of that amount (or 1.5% of Chewco's total capitalization) in an account pledged to one of the banks financing Chewco. The Information says this meant Chewco failed the accounting rules test required for it to be considered "independent" of Enron - which, in turn, meant that Enron was not entitled to remove the roughly $700 Million in debt from its books. But whatever else was or was not wrong with Enron or Chewco, it is just not the case that Enron's actual financial condition was materially affected by this scheme, which concerned less than $9 Million. A reasonable person probably would not think that whether or not it was criminal or fraudulent for Enron's books to omit the hundreds of millions of dollars of Chewco debt depends on whether Mr. Kopper's few million dollars was pledged to a bank. Put another way: most reasonable people would say that to the extent the question is posed in a criminal case, whether the Enron financial statements fairly reflected Enron financial condition in all material respects just does not and cannot depend on whether an immaterial few million dollars of Chewco's capitalization was pledged to some bank. Did Enron lose its credit rating or run huge losses because of this pledged account? Of course not. A big problem for the prosecution (and any private litigant) is that if the pledge of the "missing" 1.5% had not been there, the structure would have complied with those technical accounting rules. How can this immaterial pledge make the difference between criminal guilt or innocence - or even civil liability - with respect to representations of Enron's overall financial condition? Most reasonable people would say that a pledge of less than $9 million just can't make that kind of difference for a multi-billion dollar company - even if it technically violates an accounting rule.

The 3% capitalization rule is not found in any federal or state statute, nor is it a feature of any SEC or GAAP rule or regulation. It is a practical rule for aiding working accountants, originally worked out in off-shore leasing transactions. Justice Department focus on compliance with this 3% "independent equity" requirement is preposterous, and amounts to a post-hoc attempt to criminalize non-compliance with what is basically a rule of thumb. It is nothing short of bizarre that many of the same people who have argued that it is absurd that a mere 3% independent equity contribution could allow a special purpose corporation to be considered "independent" are now giving talismatic significance to compliance with this rule in a criminal (as opposed to a mere accounting rules) context. Such people are wrong twice. One wants to ask such people if they are now prepared to accept the legitimacy of all the off-shore vehicles which do comply with this 3% capitalization rule, now proffered as critical in determining who spends time in prison.

In sum: The amount of money Mr. Kopper says he obtained by defrauding Enron was large for an individual. But it was not material to a corporation the size of Enron. The status of less than nine million dollars may have caused a technical violation of accounting rules for special purpose entity "independence," but did not and could not materially affect Enron's substantive, real economic condition one way or the other. It's therefore probably not an oversight that Mr. Kopper does NOT plead guilty to securities or bank fraud in this Information. And, as an aside, where are the prosecutors left with respect to their larger case if it turns out that the intent behind Chewco was solely to defraud Enron - and not the public - as the Times seems to suggest?

The political aspects of these recent developments are also interesting. Many of Enron's most vigorous critics have also been critics of the Bush administration, including Senator Daschle. Many such dual-critics have suggested that the lack of Enron prosecutions was evidence of Administration enthrallment to Enron and its circle. But as KausFiles points out, in order to claim that Mr. Kopper's plea is a major indication of Enron's broad culpability, those critics must now acknowledge that the Enron task force has been taking effective action all along. But only a little while ago the Administration's critics felt it was in their interest to highlight the lack of progress.

Indeed, just days ago Paul Krugman thought it worth his effort to argue that "Enron executives may have deluded and defrauded their shareholders without actually breaking the law". But the mere fact that such a vigorous critic of the Administration and Enron has so recently doubted in public that Enron broke the law at all does not deter some of the more naively overdetermined observers from claiming matters have been clear as a looking glass from the beginning, cleaving to an "execution now, trial later" mode of thought.

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