The Spokesman for the NatWest Three

What do you do when you can’t hang out and chat with your blokes?

Well, in the case of David Bermingham — one of the three former London-based National Westminster Bank PLC bankers dubbed the “NatWest Three” in the lexicon of Enron criminal cases — he sits for this interesting interview with the Chronicle’s Tom Fowler.

Although he does not reveal how he and his co-defendants intend to defend against the prosecution, Bermingham tells the story of how he and his NatWest colleagues — Gary Mulgrew and Giles Darby — voluntarily went to the UK equivalent of the SEC in November 2001 upon learning through news reports that a transaction in which they and NatWest Bank were involved had become part of the fraud investigation of former Enron CFO Andrew Fastow and his right-hand man, Michael Kopper.

Subsequently, the UK authorities passed along the information provided to them by Bermingham and his mates to the SEC and, the next thing you know, Bermingham, Mulgrew and Darby are the subject of a criminal complaint in Houston.

No US investigator contacted Bermingham, Mulgrew or Darby to get their side of the story before firing off the criminal complaint against them, but — as Bermingham notes — the Enron Task Force probably viewed the three bankers as pawns in their effort to put pressure on Fastow. After Fastow copped a plea, the Task Force was stuck with its dubious decision to prosecute the three UK citizens.

Although not well-reported in the press yet, the case against the NatWest Three is fairly straightforward, at least as Enron-related criminal cases go.

The Task Force alleges that the three defrauded their former employer by conspiring with Fastow and Kopper to underpay NatWest for its interest in an entity named Swap Sub, an affiliate of LJM1, the Fastow/Kopper-managed special purpose entity that was created in 1999 to hedge Enron’s valuable but highly volatile interest in a technology company called Rhythms.

Fastow arranged to have an entity called Southhampton that was owned by his family, Kopper and several other Fastow underlings at Enron (including Ben Glisan) buy NatWest’s interest in Swap Sub in March, 2000 for $1 million, which was substantially more than NatWest had that interest valued at the time.

After NatWest sold out, Fastow sold a portion of the old NatWest interest in Swap Sub through Southhampton to the three bankers personally for $250,000. About a month and a half later, Fastow and Kopper arranged to have Enron and Swap Sub unwind the hedge on the Rhythms stock, which resulted in Enron purchasing a large chunk of Enron stock from Swap Sub. The NatWest Three’s net share of the Enron stock sales proceeds was $7.3 million.

In short, the Task Force alleges that the NatWest Three’s making $7.3 million on an investment of $250,000 a month and a half earlier violates the “too good to be true” rule.

Presumably, Fastow and Kopper are prepared to testify that the NatWest Three knew that Fastow and Kopper had arranged with Enron to unwind the hedge on Rhythms stock with Swap Sub, knew that such unwinding would make Swap Sub worth much more than NatWest had it valued at the time, and that neither Fastow nor the NatWest Three disclosed the situation to NatWest before the bank sold its interest in Swap Sub to Southhampton for a measly $1 million.

For their part, Bermingham, Mulgrew and Darby contend that they knew nothing about Fastow and Kopper’s plan to unwind the Rhythms hedge with Enron, that the $1 million price that Southhampton paid for NatWest’s interest in Swap Sub was substantially more than it was worth at the time, that the $250,000 price they paid for an interest in Swap Sub was similarly reasonable given the risk of the investment, and that they were as pleasantly surprised as anyone on the big return on their investment when Enron and Swap Sub unwound the hedge a month and a half later (remember, all this took place before the bursting of the stock market bubble on tech stocks).

Interestingly, despite the fact that all of the foregoing information has been well-known to NatWest for several years now, the bank did not pursue either a civil case or criminal prosecution of the NatWest Three in the UK.

By the way, colorful Houston-based criminal defense attorney Dan Cogdell, who successfully defended former Enron in-house accountant Sheila Kahanek in the Nigerian Barge case, is defending Bermingham. Cogdell’s involvement ratchets up the entertainment value of any case, so stay tuned.

4 thoughts on “The Spokesman for the NatWest Three

  1. Why do you believe NatWest has not been willing to prosecute? Do you believe it could be tied to the bank deciding that it has MUCH more to lose by potential civil liabilities that could be claimed by “aiding & abetting” Enron Corp. in a fraud complaint?
    In other words, you repeatedly make the point that NatWest not coming forth to publicly complain somehow makes the NatWest 3 innocent. To the contrary, this view of the story would have them guilty and rationally explain the lack of NatWest complaint.

  2. Jeff, what’s NatWest’s fraud? For investing in LJM1 and Swap Sub? There is certainly nothing wrong with that, and there has never been any allegation by the Enron Task Force or any other party that NatWest was involved in any wrongdoing by investing in those entities, or that the primary purpose of LJM1 (to hedge Enron’s huge gain in Rhythms stock value) was in any way improper.
    Inasmuch as NatWest was not involved in the transaction under which the NatWest Three received the big money for their investment in Southhampton after Fastow and Enron unwound the hedge of Rhythms stock, it’s hard to understand how an aiding and abetting case could be made against NatWest. Rather, it would seem that if it were clear beyond a reasonable doubt that the NatWest Three received big money fraudulently on their investment in Southhampton that NatWest should have properly received for its investment in Swap Sub (that’s essentially the Task Force’s case against the three bankers), then it would seem that NatWest would have a great incentive to recover the ill-gotten gains from the three bankers either though a civil or criminal proceeding in the UK. NatWest has not, and I think that speaks volumes about the theory of the Task Force’s case.

  3. Your posted response to my initial comment avoids the substance of my point.
    I agree that NatWest (the institution) did not commit a crime. However, NatWest’s three senior bankers/officers appear to have engaged in blatant criminal activity. As officers, they are agents of the bank. A company cannot commit a crime, only its employees whose actions are directly attributable to said company. Similarly, Arthur Andersen (the institution) did not commit a crime of obstruction. However, its employees/Partners did and the firm paid with its life.
    NatWest logically desires to avoid a such reprecussions and therefore has elected not to “go after” the $7 million. It has rationally concluded that $7mm is a small price to pay to avoid even a small probability that agrieved parties (or agressive litigation counsel) gain meaningful arguments towards a complaint against NatWest (the institution).
    If you do not buy into my argument (or are conflicted from taking such view), how do you explain NatWest chosing to not seek recovery of the $7mm?

  4. Jeff, your observation that “NatWest’s three senior bankers/officers appear to have engaged in blatant criminal activity” reminds me of the passage in the Fifth Circuit’s decision today setting aside the convictions in the Nigerian Barge case — that is, if you start from the premise that a crime has occurred, then you are much more likely to conclude that a crime has occurred.
    As I understand the situation at this point, Southhampton bought NatWest’s interest in SwapSub for $1M, which was substantially more than the current financials relating to such interest suggested that it was worth. The NatWest Three then took a flyer on buying that interest from Southhampton. As a result of relatively minor swings in the value of Enron and/or Rhythms stock, that interest ended up being worth over $7M a month and a half later when Fastow persuaded Enron to unwind the hedge and buy back the Enron stock from SwapSub, which provided the proceeds that were distributed to the NatWest Three for their interest.
    The NatWest Three contend that they knew nothing about Fastow’s arrangement with Enron to unwind the hedge and that they were as surprised as anyone when he was able to pull it off. Fastow and Kopper obviously will contend otherwise. But the fact that NatWest has not gone after the $7M from the NatWest Three indicates to me more that the bank doesn’t think it has much of a case to recover the money than the bank is worried about being implicated in a crime by its former agents.
    By the way, if what the NatWest Three contend is true, then what exactly is the crime that you are talking about here?

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