Jason Leopold: Enron Trial Avoids the Real Ripoff
Enron Trial Avoids the Real Ripoff
By Jason Leopold
t r u t h o u t | Report
Monday 27 February 2006
More than 400 pages of documents released by federal energy regulators suggest that former Enron chairman Ken Lay and former chief executive Jeff Skilling were aware that the company's west coast traders may have broken the law by using manipulative trading tactics in California to boost Enron's profits during the height of the state's power crisis.
Skilling and Lay are being prosecuted for securities fraud and numerous other charges in a federal courthouse in Houston. A judge has prohibited prosecutors from introducing recorded evidence related to the California energy crisis in the case against Skilling and Lay, saying it's too "prejudicial."
The transcripts are from recorded conversations between Enron traders, company attorneys and Enron's public and governmental affairs departments that took place at the height of the California electricity crisis in 2000 and 2001. The material provides the most vivid portrait to date of the company's questionable trading practices that ignited California's power crisis, and led to a financial meltdown at the company which Lay and Skilling hid from securities regulators and investors, and which both men are now being prosecuted for.
In the spring of 2001, one of Enron's most powerful Washington lobbyists met with several members of the Bush administration to talk about Enron's opposition to price controls on electricity sales in California.
The lobbyist was told by Tim Belden, the mastermind behind Enron's notorious trading scams, less than a year earlier that Belden and other Enron traders who worked in Portland, Oregon, spent the better part of 2000 and 2001 breaking the rules governing California's power market "when opportunities presented themselves to make money."
"There's really two - two things that happened - two areas ... in terms of things blowing up," Belden told Richard Shapiro, Enron's vice president of regulatory affairs and one of the company's lobbyists, in August 2000. "One is our day-ahead scheduling practices and then the other is our real-time operations. Um, we've been doing and have been doing for two years a lot of activity in, you know, there's black, there's white and there's gray. Um, we have been endeavoring into the gray area when opportunities present themselves to make money. We have now moved out of the gray area into the clearly what's legal area ... not even legal, but what's, um, there's like the letter of the law, the letter of the rules and the spirit of the rules. Um, we've been exploiting the letter of the rules - or literally interpreted - interpreting the rules, um, in California when we can make money ..."
California's electricity crisis wreaked havoc on consumers and businesses from the summer of 2000 to June of 2001, resulting in three days of rolling blackouts and hundreds of emergency power alerts and forcing the state's largest utility, Pacific Gas & Electric, into bankruptcy. The crisis cost the state more than $70 billion.
In the conversation between Shapiro and Belden, Shapiro urged Belden to pull back on his trading schemes in California - such as artificially clogging transmission lines, sending power out of state and submitting false data to the state's grid operator - and to begin working more closely within the law because of the severe political risk associated with Enron and the billions of dollars the company reaped from California's electricity crisis to fill its coffers.
But despite the fact that Shapiro was in the know about Enron's questionable trading practices, he continued to lobby powerful Washington lawmakers, urging them not to fix the market problems in California, saying the crisis was the state's fault for not building enough power plants, according to public documents from the House Governmental Affairs Committee.
Belden, however, told Shapiro that he would continue to exploit the rules in California, even though he might be breaking the law, as long as it didn't cause the lights to go out in the state. He added that if Skilling were forced to testify before a commission about the inner workings of the West Coast trading desk it could hurt Belden's career.
"I know there's a lot of political risk and I know that we got a ton of money in our book and then - if Jeff Skilling ah, has to go in front of some commission and explain the activities of the West Power Group, that's probably not so great for my career," Belden told Shapiro, according to the transcripts.
This is the first revelation that an Enron lobbyist was briefed on the company's manipulative trading practices, and it appears likely that other executives were also in the know. Shapiro wielded enormous influence with members of the Bush administration. On May 23, 2001, he met with White House economic adviser Robert McNally and Energy Secretary Spencer Abraham's chief of staff about Bush's National Energy Policy and Enron's opposition to price controls in California.
The meeting between Shapiro and McNally came at a crucial time for Enron. The company's most senior executives recognized that Enron stood to lose hundreds of millions in profits and its standing on Wall Street if California lawmakers were successful in getting federal energy regulators to rewrite the rules in California's power market. Judging by the events that followed, it appears that Bush and Cheney were in Enron's corner.
Four days before Shapiro met with McNally and Abraham's staff, on May 17, 2001, Vice President Dick Cheney was interviewed by the television news program Frontline. When asked if companies like Enron were behaving like a "cartel" and manipulating the California power market, Cheney responded with a resounding "no."
"The problem you had in California was caused by a combination of things - an unwise regulatory scheme, because they didn't really deregulate. Now they're trapped from unwise regulatory schemes, plus not having addressed the supply side of the issue. They've obviously created major problems for themselves ..."
That same day, May 17, 2001, Cheney and Bush unveiled the details of the National Energy Policy, in which Cheney adopted seven of Ken Lay's suggestions, according to published reports. Had the intimate details of Enron's trading schemes been known to California officials, it most certainly would have derailed Bush's energy policy, which called for keeping many of deregulation's key components in place.
A few months earlier, Sue Mara, an Enron governmental affairs employee, phoned Bob Badeer, an Enron trader, with a question from Ken Lay. Following public comments by Governor Gray Davis about the state of California's energy crisis, Mara said Lay personally wanted to know if Davis's comments had affected the price of power in the forward market. That Lay would be interested in such minute details contradicts the former chairman's public statements that he had no idea about the shenanigans taking place inside Enron.
California signed an unprecedented $42 billion in long-term electricity contracts with more than two-dozen energy companies to put the brakes on skyrocketing wholesale power prices. The state no longer bought the bulk of its power needs in the open market, where companies like Enron earned its windfall.
In June 2001, shortly after the details of the long-term contracts were revealed, Skilling and Lay summoned Belden to Houston to discuss the company's West Coast trading division, which Belden said in one recorded conversation accounted for 80 percent of Enron's profits in 2000 and 2001, to determine if anything could be done to salvage the operation, according to one person working with the Justice Department on the investigation.
It's unclear what came out of that meeting, but two months later Jeff Skilling resigned from Enron. Just three months earlier, on March 9, 2001, he flew to Portland to take Belden and other senior traders out to dinner at Higgins restaurant to celebrate Enron's successful first quarter earnings. In the transcripts released by FERC, traders said they made upwards of $10 million a day in 2000 by utilizing many of the trading scams developed by Belden.
What's surprising about those scams Enron traders pulled in California is how well-known it was within the company's Houston headquarters, according to the transcripts. Indeed, one public affairs official at Enron instructed a trader based in the company's Portland, Oregon trading division to lie to a Wall Street Journal reporter who wanted to write a story about Enron's lucrative trading desk.
"The thing is anything they'd ask you, you'd have to lie because you wouldn't want to tell them the truth," an unidentified Enron employee in the company's governmental affairs department said to an Enron trader. The governmental affairs employee then attempts to talk the trader out of doing the interview with the Journal. "I wouldn't do it (the interview). 'Cause first of all, you'd have to tell 'em a lot of lies, cause if you told 'em the truth..."
"I'd get in trouble," the trader says, interrupting the governmental affairs employee.
"You'd get in trouble," the governmental affairs employee said.
Perhaps the most prescient part of the transcript is when John Forney, a senior Enron trader who worked closely with Belden and was indicted on conspiracy charges, fears that he may be sent to jail.
In a conversation Forney had with Belden, Forney seems to have misgivings about one scheme he just pulled that involved California and Canada.
Belden seems to brush off Forney's concerns, according to the transcripts, and Forney says he can't believe that none of his Enron colleagues seem to be concerned about the possibility of going to jail as a result of the schemes he and other traders have pulled.
"I only want to go to jail once," Forney says.
"Yeah," Belden says. "Once in this country."
Whether Skilling and Lay join their one-time trading star remains to be seen.
Jason Leopold spent two years covering California's electricity crisis as Los Angeles bureau chief of Dow Jones Newswires. Jason has spent the last year cultivating sources close to the CIA leak invesigation, and will be a regular contributer to t r u t h o u t.