The Government’s noose around neck of Jeffrey Skilling and Kenneth Lay got a bit tighter today as Kevin P. Hannon, former chief operating officer of Enron Corp.’s heavily promoted telecommunications unit, became the latest former Enron executive to plead guilty to criminal charges.
Mr. Hannon, 44, pled in U.S. District Court in Houston to one count of conspiracy to commit securities and wire fraud, and agreed in the plea bargain to cooperate with the Enron Task Force’s continuing criminal investigation and prosecution of other former Enron executives. One of those undoubtedly will be Mr. Skilling, who was heavily involved in the promotion of Enron’s telecommunications unit. The deal also provides that Mr. Hannon faces up to five years in prison, the payment of $3.2 million in forfeitures and penalties, and the settlement of a related SEC civil suit.
In the late 1990s, Enron’s top executives touted Enron Broadband as one of the company’s best growth opportunities. Enthusiasm among investors for the broadband operation helped increase Enron’s stock price despite the fact that the unit never came close to meeting either company or market expectations.
As part of his plea agreement, Mr. Hannon admitted that he overstated Enron Broadband’s accomplishments. In particular, during a January 2001 conference with securities analysts, Mr. Hannon admitted in the plea bargain that he took part in a presentation that “was intentionally misleading and falsely portrayed the company as a commercial and business success. I conspired with other Enron employees to achieve this improper purpose.”
Meanwhile, the beginning of the trial of the Nigerian Barge case is now less than three weeks away.

This Wall Street Journal ($) article reports that Bank of New York Co. sued Citigroup Inc. earlier this week over the sale of financial instruments related to Enron Corp. The lawsuit could involve as much as $2.5 billion in liability for Citigroup.
The lawsuit is particularly interesting because it involves credit insurance, which has become one of the trendiest new financial products over recent years. Such insurance provides investors a hedge against the risk of insolvency for their investment, and the Bank of New York – Citigroup dispute focuses on whether banks involved in the market may have superior knowledge to other participants.
The suit alleges Citigroup knew (or presumably “should have known”) Enron’s debts were far greater than the numbers presented in its public financial statements between 1999 and when Enron went into bankruptcy in early December, 2001. The suit alleges that Citigroup just could not get enough of Enron’s business and that by 1999, Citigroup’s exposure to Enron totaled a staggering $1.7 billion, which was four times Citigroup’s internal limit on exposure to Enron. Bank of New York alleges that Citigroup’s exposure increased over the next two years as Enron entered a series of financial deals with Citigroup that enabled Enron to mask debt as cash flow on its financial statements.
In short, Bank of New York alleges that Enron was a Ponzi scheme and that Citigroup knew it. The lawsuit alleges that the only reason Citigroup did not cut Enron off from new financing was because Citigroup knew that Enron would collapse before Enron could pay it back.
So, the lawsuit alleges that Citigroup approached major institutional investors to reduce its Enron exposure by promoting an investment in “Yosemite” securities, a series of notes with a total face value of $2.4 billion that were linked to the creditworthiness of Enron. So long as Enron remained financially viable, the investors in the Yosemites would receive interest payments that were more attractive than the interest rate on Enron bonds. If Enron defaulted on any debt obligations or filed for bankruptcy protection, the lawsuit alleges that Citigroup was supposed to replace the Yosemites with Enron bonds that would likely be worth far less than 100 cents on the dollar to investors, but which would rank relatively high in claim priority in an Enron bankruptcy.
As sad stories go, this dispute was triggered because Enron and its other creditors are asserting that the investors ought should be subordinate to other creditors in Enron’s claim priority ranking because of Citigroup’s involvement in the deception that helped cause Enron’s bankruptcy. If Enron’s position is sustained and the claims of the Yosemite securities holders go to the bottom of the Enron claim totem pole, then those investors will likely get nothing on their claims.
Such a result will not make the holders of those claims happy. Most of those Yosemite securities claims are now held by distressed-debt investors — a notoriously hard-knuckled group in insolvency cases — who bought the securities from the original holders at discounted prices between 10 to 50 cents on the dollar.
Just another $2.5 billion aftershock of the Enron financial earthquake. This one should be interesting.

Mark Koenig, the former head of Enron‘s investor relations section, agreed to a plea bargain today with the Enron Task Force in regard to newly-filed criminal charges against him, and agreed with the Securities and Exchange Commission to pay civil penalties of $1.49 million to settle related civil fraud charges against him.
Mr. Koenig worked for Enron from 1985 through 2002. He is charged with participating in a scheme to mislead investors about the financial affairs of a couple of Enron units for the purpose of making those units appear to be more valuable than they really were so that their alleged true, lower worth would not dilute the value of Enron stock. The incidents set forth in Koenig’s plea deal are also included in the indictment of Enron’s remaining “big three” unconvicted executives — Kenneth Lay, Jeffrey Skilling, and Richard Causey. Mr. Koenig appeared this morning before U.S. Magistrate Judge Frances Stacy and was released on bond.
Paula Rieker, who worked under Mr. Koenig, pled guilty earlier this year to an insider trading charge and is cooperating with the Enron Task Force.

The Enron Task Force’s recent decision to re-indict the defendants in the Enron-related Nigerian Barge case has caused another postponement of the trial in that case.
The trial, which was scheduled to begin on either August 16 or 17th, has been pushed back by U.S. District Judge Ewing Werlein until September 20. That trial schedule would still make it the first criminal case involving former Enron executives actually to go to trial since Enron’s collapse almost three years ago.
The government decided to re-indict the defendants recently because of concern over the U.S. Supreme Court’s recent Blakely decision (prior posts here), which has called into question the Constitutionality of both state and federal sentencing guidelines, particularly in cases in which the jury did not consider the alleged loss caused by the alleged crime.
Included in the new indictment in the Nigerian Barge case are allegations that a scheme to pretend Enron sold Nigerian barges caused the loss of more than $80 million, which, if proven, would add years to a sentence under the federal sentencing guidelines.
However, I am not following the governement’s theory of the case here. Neither Enron nor Merrill Lynch lost any money on this transaction, which was a relatively small deal in Enron’s world involving about $12 million in profits for Merrill Lynch. Moreover, the alleged illegal accounting treatment for the deal was not discovered until after Enron was well into its bankruptcy case, so public disclosure of that alleged impropriety had no market impact on Enron’s already worthless stock. Accordingly, I am still trying to figure out the government’s theory that the deal caused damages of $80 million. Oh well, maybe I’ll try to ask Jamie Olis.
At any rate, defense attorneys in the Nigerian Barge case had asked for the postponement because they said new expert financial testimony is necessary and new defenses need to be developed. The government asked Judge Werlein for a bifurcated trial in which the jury hears only about the alleged crimes in the first part and then, if there is a conviction, the jury would hear evidence of sentencing factors in the second stage.

John Forney, former manager of Enron Corp.’s online trading desk, pleaded guilty today to charges in California that he manipulated energy markets during California’s power crisis.
Mr. Forney, who is 42, is the third Enron executive to plead guilty to manipulating electricity prices from Enron’s now-defunct trading office in Portland, Ore. Former Enron executives Timothy N. Belden and Jeffrey S. Richter pled guilty last year and have been cooperating with the Justice Department in its continuing investigation into Enron.
As a part of the plea bargain, Mr. Forney is expected to cooperate with the ongoing investigation into Enron’s trading desk and how other energy firms may have played a role in manipulating energy markets. Four employees of Reliant Corp. have already been charged with deliberately shutting down power plants to increase the price of California electricity.
Over two and a half years after Enron collapsed into bankruptcy, the first criminal trial involving former Enron executives is currently scheduled to begin in Houston on August 16 before U.S. District Judge Ewing Werlein in the case known as “The Nigerian Barge case.”

Enron Corp. has forcefully asked the New York Bankruptcy Court overseeing its chapter 11 case to enjoin the Pension Benefit Guaranty Corp.’s lawsuit in Houston to take over four of Enron’s retirement plans.
In pleadings filed Wednesday, Enron accused the PBGC of, among other things, forum shopping, attempting to frustrate its reorganization plan, and usurping the Bankruptcy Court’s authority to consider claims against the company. Not bad for starters.
In short, Enron accused the PBGC of trying to obtain in the Houston U.S. District Court what it could accomplish in the New York Bankruptcy Court during the confirmation hearing on Enron’s plan. The Bankruptcy Court previously denied the PBGC’s objection to Enron’s plan, which the Bankruptcy Court confirmed on July 15.
The PBGC — which provides a measure of subsidy for defunct private-sector pensions — is trying to proceed with a lawsuit that it filed June 3 in U.S. District Court in Houston to terminate Enron’s four woefully underfunded pension plans.
By pursuing the termination action in Houston federal court, Enron asserts that the PBGC is trying to avoid Enron’s plan treatment for its unliquidated and contested claims and elevate those claims over those of similarly situated creditors. The PBGC has asserted claims against Enron totaling over $300 million for the Enron-related pension plans — the Enron Corp. Cash Balance Plan, Garden State Paper Pension Plan, Enron Financial Services Pension Plan, and San Juan Gas Co. Pension Plan. Those four plans have approximately 17,000 participants.
As long as the agency’s claims remain unresolved, Enron is required to reserve under its reorganization plan for the full amount of the PBGC’s claims. If the PBGC claims are disallowed or reduced, then the amount Enron will have to pay to terminate the four pension plans will likely be substantially less than the amount that the the PBGC seeks in its termination action. Enron contends that the Bankruptcy Court must determine the amount of the PBGC claims before the termination action can proceed and, thus, asserts that the Bankruptcy Court should enjoin the PBGC from proceeding with the termination action in Houston federal court.

An English court yesterday provided a glimpse of the difference between the civil justice there and the American system as it relates to controversial business practices such as those that Enron Corporation practiced.
In this decision handed down by an English court yesterday, J.P. Morgan Chase & Co. won a lawsuit against a WestLB AG-led banking syndicate related to Morgan’s Enron financing in which the English judge ordered the WestLb syndicate to honor a $165 million letter of credit that the syndicate had previously refused to pay.
That’s the first big difference. In the United States, there is no way that a plaintiff in this lawsuit would not attempt to take advantage of the public bias against Enron by demanding a jury trial. In the English system, jury trials in lawsuits over complicated business transactions are rare.
The case involved Morgan’s involvement in an offshore financing vehicle called Mahonia Ltd. In a complex trading arrangement, Morgan provided money to Enron, which then returned the payments to Morgan in the form of contracts for the future delivery of gas. Those payments — known as “gas prepay contracts” — were paid through an offshore vehicle called Mahonia.
When Enron collapsed in late 2001, Morgan had to commence litigation to collect on its security for the Enron-related financing. WestLB was the leader of a banking syndicate that had posted a $165 million letter of credit, which is a common form of security in which the WestLB syndicate receives a fee for taking the risk of Enron’s insolvency in regard to the financing — i.e., WestLB agrees to pay Morgan $165 million and assume Morgan’s rights against Enron if Enron goes bust on the deal.
Taking advantage of the unprecedented public outcry over Enron’s business practices when Enron collapse, WestLB refused to honor the letter of credit, alleging that the transactions were part of a “fraudulent scheme” that essentially disguised Morgan’s loans to Enron. Given the due diligence that takes place on these types of transactions, WestLB’s claims bordered on the preposterous, but then trying to weasel out of an Enron-related obligation is fair game these days. Morgan sued WestLB, WestLB countersued, and the trial began in London’s High Court of Justice in January.
The London case was just the latest litigation for Morgan over the Mahonia deal. When it set up the deal with Enron, Morgan hedged its risk by arranging to have several insurance companies issue $935 million of surety bonds to ensure Morgan against the risk of Enron’s default on the deal. When Enron filed for bankruptcy protection, those insurers — just like the WestAB syndicate — refused to pay using the same argument that the deal was a fraud designed to disguise loans to Enron. That dispute ended up in a jury trial in federal district court in Manhattan. Immediately before the jury was about to render a verdict in the case in January 2003, Morgan and the insurers agreed to a settlement in which the insurers paid 60% of the costs relating to Enron’s default, leaving Morgan holding the bag for the balance (approximately $400 million).
In the English case, High Court Justice Jeremy Cooke on Tuesday ruled in favor of Morgan and Mahonia by concluding that Enron’s accounting for the transaction did not breach U.S. accounting and securities rules. He ordered the WestLB banking syndicate to pay on the letter of credit, plus interest and costs, which is what the WestLB syndicate would have normally done in the first place but for the public outcry over anything related to Enron.
There is no question in my mind that Morgan would have agreed to settle with the WestAB syndicate on the same terms that it settled with the insurers over the Mahonia deal if this dispute had been tried to a probably biased American jury rather than a dispassionate English judge. Thus, that change in venue just saved Morgan at least a cool $70 million.
The Mahonia-related trading arrangement has been the subject of extensive scrutiny in connection with Enron’s chapter 11 case and related litigation. Last year, Morgan and Citigroup entered into a settlement with the Securities and Exchange Commission and U.S. regulators in which they agreed to pay fines and penalties totaling about $300 million related to their involvement with Enron and Dynegy Inc., a Houston-based energy company that attempted to acquire Enron immediately before the commencement of the Enron chapter 11 case.

With strong prompting from the Justice Department, the issues regarding the validity of federal and state sentencing guidelines generated by the U.S. Supreme Court’s recent Blakely v. Washington decision are going to be teed up again soon in the Supreme Court. Here are my previous posts on the aftermath of the Blakely decision.
Early this week, the U.S. Supreme Court Justices are expected to grant expedited review of at least one of several post-Blakely lower court rulings that present the issue of whether federal sentencing guidelines are unconstitutional in light of the Court’s decision in Blakely. That ruling struck down a Washington state sentencing system similar to sentencing in over a dozen states and in the federal system, and requires that juries determine facts that increase a defendant’s sentence.
When a landmark high court decision is such as Blakely is handed down, the Supreme Court usually allows a reasonable amount of time (i.e., several years) to address follow-up issues that arise before the Court re-addresses the core issue. However, Blakely unleashed most U.S. District Judges’ pent-up antipathy for the sentencing guidelines and their corresponding limitations on the exercise of judicial discretion in federal sentencing. Thus, with many judges devising their own methods for coping with Blakely in regard to sentencing matters, the Justice Department is pushing the Supreme Court for an unusually quick reassessment of the issues raised in Blakely.
The SCOTUS clarification of the impact of Blakely is being followed particularly closely by the criminal defense bar in Houston, which is already dealing with new indictments in Enron-related criminal cases as the Justice Department scurries to comply with the requirements of Blakely. Moreover, the sad case of Jamie Olis — in which the absurdly long 25 year sentence was issued prior to Blakely — could also be affected by that decision and its progeny.
Ohio State University law professor Douglas Berman‘s blog Sentencing Law and Policy is the best website for keeping up with analysis of post-Blakely developments.

Ken Rice, the former head of Enron?s broadband Internet business, became the 11th person to plead guilty to an Enron-related crime when he admitted to a single count of securities fraud this morning before U.S. District Judge Vanessa Gilmore in Houston.
The plea agreement requires Mr. Rice, who is 45, to cooperate with the government in ongoing investigations and trials and forfeit $13.7 million in cash and property. Mr. Rice faces a maximum 10 years in prison and a $1 million fine.
Mr. Rice faced charges of conspiracy, securities fraud, wire fraud, money laundering and insider trading in this multi-count indictment. Attorneys close to the case have been expecting Mr. Rice to reach a deal with prosecutors for several weeks. As a division head, Mr. Rice reported directly to former Enron CEO and COO Jeffrey Skilling, and may have had regular contact with former Enron Chairman Kenneth Lay as well. Both Messrs. Skilling and Lay have pled not guilty to a variety of Enron-related charges in another pending criminal case.
Mr. Rice’s plea deal centers on a Jan. 20, 2000 meeting with analysts where Rice and others at the company touted the current and future abilities of Enron?s broadband network. That same meeting was mentioned in the indictment against Mr. Skilling, which claims he made similarly false claims about the abilities of the network and the potential of the business. It?s certainly possible that Enron Task Force prosecutors will Rice as a witness in an attempt to corroborate the charges against Mr. Skilling.
According to the Enron Task Force, Mr. Rice sold 1.2 million shares of Enron stock for more than $76 million while he knew Enron Broadband Services was failing. The unit never generated a profit and was abandoned shortly after Enron’s bankruptcy filing in early December 2001. Mr. Rice quit the company in 2001 after his stock sale and several months before Enron went bankrupt. He had served as CEO of Enron’s trading unit — Enron Capital and Trade — from 1996 to 1999 before taking over the high profile broadband unit that Enron claimed was responsible for millions in profits. Enron’s share price spiked to $90 in August 2000 as Enron promoted the venture, among other ventures. Mr. Rice was indicted on April 29, 2003 — along with seven other former broadband employees — in a 218-count indictment that claimed the men lied about the value and capabilities of Enron?s internet business.
The remaining defendants in the Enron broadband case are Joe Hirko, another former broadband CEO; Kevin Hannon, former chief operating officer; Scott Yeager and Rex Shelby, former senior vice presidents; and Kevin Howard and Michael Krautz, former executives. Each one has pled not guilty to all charges. The trial of the case is scheduled to begin to begin Oct. 4. The first criminal trial involving former Enron executives will take place in the “Nigerian Barge case,” which is scheduled for trial beginning on August 16.

Setting up a potential jurisdictional battle between two federal courts, Enron Corp. filed an objection in U.S. Bankruptcy Court in Manhattan yesterday seeking to block a settlement payment of the $85 million in insurance proceeds to approximately 20,000 current and former Enron employees that is emanating out of pending litigation in the U.S. District Court for the Southern District of Texas. Here is an earlier post on the proposed settlement.
Enron employees lost hundreds of millions of dollars when the Enron stock in their 401(k) plan became worthless as the company spiraled into bankruptcy in late 2001. After they sued Enron in 2002, U.S. District Judge Melinda Harmon in Houston approved the tentative settlement to the former Enron retirement-plan participants earlier this summer. The final hearing on the proposed settlement is scheduled for Aug. 19.
The settlement, which would be the largest to date for a case involving company stock in retirement plans, would be largely paid by Associated Electric & Gas Insurance Services Ltd. and Federal Insurance Co. Enron had $85 million in liability insurance to cover company employees who were acting as fiduciaries.
In pleadings filed with the Enron bankruptcy court in New York, Enron and its creditors argue the money is an asset of the bankruptcy estate and the bankruptcy court should decide who gets it. Enron and many of its creditors have previously filed pleadings in the bankruptcy case asserting that the employees’ claims should be subordinate to all other creditors.