On the day that the jury in the Enron Broadband trial began deliberations, the Enron Task Force announced that Christopher Calger, a former executive with Enron North America, had pleaded guilty to a criminal conspiracy count and agreed to cooperate with Task Force prosecutors in their investigation of a transaction that is expected to be part of the Task Force’s upcoming “legacy” criminal trial against former Enron top executives, Kenneth Lay, Jeffrey Skilling, and Richard Causey. The Department of Justice press release on the indictment is here.
The plea bargain involved a convoluted 2000 transaction known as Coyote Springs II in which the company sold some energy assets — including a turbine and an equity interest in a power plant — to another company called Avista Corp. That transaction is part of the wide-ranging indictment against Messrs. Skilling and Causey in which the Task Force alleges that Mr. Causey knew about the hidden role in the deal of LJM2, which is one of the seperate partnership entities that Andrew Fastow managed while serving as CFO of Enron. Although Mr. Causey’s name is not used in the plea deal, Mr. Calger admits that Mr. Causey had approved part of the LJM2 financial arrangement.

Although the Justice Department’s press release on the Calger plea deal is almost incomprehensible, this is what can be pieced together at this point. Mr. Calger was a vice president in charge of the West Power Origination group of Enron North America (ENA), in which he supervised the sale of an ENA project known as Coyote Springs II (CS2) to a subsidiary of Avista Corp.
The CS2 project consisted of essentially three property interests, an equity interest in a power plant, an interest in a turbine that would be placed in the plant, and an interest in a construction contract to build the plant. The government alleges that Mr. Calger and others engaged in a scheme to allow Enron to recognize earnings prematurely and improperly on the part of the deal relating to the turbine sale by violating a requirement of Enron’s auditors (Arthur Andersen) that conditioned Enron’s recognition of an immediate gain on the sale of the turbine being “independent” from the sale of the equity in the plant. To accomplish such independence, Andersen required the turbine sale be seperated by two weeks from the sale of equity. So goes the interpretation and implementation of often arcane accounting rules.
At any rate, Andersen’s requirement of a two week seperation in the transaction apparently did not sit well with Avista, which did not want to take the risk that it would be stuck with the turbine if for some reason its purchase of the equity in the plant did not close two weeks later. To alleviate that concern, the government alleges that Mr. Fastow intervened with the help of LJM2, one of the Fastow-controlled partnerships that were otherwise seperate entities from Enron.
According to the government’s version of events, ENA financed an LJM2 “put” option to Avista under which Avista had the right to require LJM2 to buy the turbine from Avista if Enron did not come through and sell the equity interest in the plant to Avista two weeks later as promised. In that regard, LJM2 apparently agreed to refund to ENA about $3.1 million of the $3.4 million put option payment if the option expired as a result of Avista closing on the purchase of the equity interest in the plant. Finally, ENA also allegedly agreed to buy the turbine from LJM2 if Avista exercised the put option requiring LJM2 to purchase the turbine from Avista.
The hedging transactions turned out not to be needed as the deal proceeded to close as planned. The put option expired when Avista’s purchase of the equity interest in the plant from ENA closed two weeks after Avista’s purchase of the turbine, and LJM2’s $3.1 million “put option refund” to ENA was allegedly financed by Enron through a credit to ENA, with LJM2 promising to repay Enron that amount in connection with “future transactions.”
This is where the DOJ press release gets a bit foggy. According to the government, Mr. Calger admits in his plea agreement that ENA “improperly” hid LJM2’s participation in the transaction and “oral agreements referenced above” (no such oral agreements are referenced in the press release) from Arthur Andersen. To make the government’s position even more confusing, the Task Force alleges that Mr. Calger admits receiving “a draft legal risk memorandum” relating to the transaction in which an in-house Enron lawyer confirms LJM2’s participation in the transaction and states “in substance” that the “understanding” between ENA and LJM2 could not be documented due to “accounting concerns” and that such “understanding” was not contained in ENA’s internal deal approval sheet for the transaction. Without explaining how a reference to LJM2’s participation in the transaction in an internal ENA memorandum equates to hiding LJM2’s participation in the transaction, the government goes on to contend that Mr. Calger admits that ENA withheld “this information from outside review” while Enron’s internal lawyers and accountants approved the transaction.
Accordingly, based on the foregoing description of the transaction, count me as skeptical that Mr. Calger is truly guilty of anything other than melting to the not insubstantial pressure that the Task Force placed on him to plead guilty and agree to testify against Mr. Causey. Inasmuch as there does not appear to be anything wrong or particularly unusual with ENA financing a hedge for Avista in the form of an LJM2 put option, it appears that the government’s focus on this transaction will probably be the alleged oral promise of ENA to purchase the turbine from LJM2 in the event Avista had exercised the put that required LJM2 to purchase the turbine from Avista. As it argued in the Nigerian Barge case, the government will probably contend that the ENA sale of the turbine to Avista was not a “true sale” because of ENA’s alleged contingent obligation to repurchase the turbine from LJM2.
At any rate, my sense is that the Calger plea bargain is an effort to place more pressure on Mr. Causey to enter into a similar plea deal in which he would agree to testify against Messrs. Skilling and Lay because — after the embarrassing impeachment of its key witness in the Enron Broadband trial — the Task Force cannot be particularly comfortable with the prospect of the discredited Mr. Fastow being their key witness in the upcoming legacy trial.
Mr. Calger is the 34th person to be charged and the 16th individual to enter into a plea bargain as part of the government’s Enron criminal investigation. The Calger plea deal is a sign that the Task Force is ratcheting up the pressure on other potential witnesses for the upcoming legacy trial, which is scheduled to begin in mid-January, 2006. The Task Force has already contended in court papers in that case that they believe that Messrs. Lay, Skilling and Causey had more than 100 co-conspirators, none of whom have yet to be identified publicly. The use of the co-conspirator tag to chill witnesses from testifying favorably for Messrs. Lay, Skilling and Causey — while at the same time procuring favorable prosecution testimony by pressuring witnesses such as Mr. Calger into plea deals over questionable alleged crimes — is yet another dubious tactic that the government is using to elevate obtaining convictions over the pursuit of truth in the ongoing saga of Enron.