Interesting article from Crammit....
Specter of Insider Trading Will Rise From Enron's Ashes
By James J. Cramer
02/08/2002 09:30 AM EST
Read More
Click here for the latest from James J. Cramer
Stop wondering how Citigroup (C:NYSE - news - commentary - research - analysis) and all of these other institutions knew to hedge out Enron. Start wondering how much money was made shorting Enron by people who were in the know. And stay tuned: I think when the smoke clears, we are going to have the first major insider trading case brought by the government against people who knew that a company was going down and shorted the stock to oblivion.
Here's why.
On Oct. 26, 2000, LJM Investments, the disgustingly conflicted partnership/plaything of Andrew Fastow, the Fifth Amendment-pleading former CFO, held an annual meeting. At that annual meeting, Fastow discussed how LJM worked. (By the way, "See No Evil" Skilling, the former CEO, was a guest speaker at the meeting!)
A lot of it was pretty boilerplate. LJM was meant to take assets off the books of Enron. Why anyone would want to be in this partnership was unclear, but as long as the stock market was going up, the partnership could make money. There was, however, one line that blew me away. On page 37 of the partnership meeting brochure, in a description of just one of the sample investments of the partnership, Raptor I, is the following line: "Major risk to LJM is that Enron stock price drops below $48 per share, six months after closing." At the time, that would have been a 43% decline from where the stock was.
That's all you need to know. If you were in that room and you read that line, you knew that LJM could go down if Enron's stock declined precipitously. You didn't necessarily know why things would go kerflooey if Enron touched $48, but you could believe that Enron might have bought a put from LJM that couldn't be guaranteed below $48, or could have an understanding that Enron might have been obligated to issue so many millions of shares to LJM that could hurt Enron. Either way, when you saw that risk level, $48, you knew that Enron could be in huge trouble once it hit that price.
Who was at that meeting? The records show that Chase Capital, World Air Lease, GE Capital, JP Morgan Capital, Merrill Lynch, C&I Partners, Dresdner Bank, AON, Rho Management, Credit Suisse First Boston, Ulysses Partners, Fort Washington Private Equity, Morgan Stanley and First Union Investors had representatives there.
Every one of the representatives of these institutions at this meeting should have been able to know that Enron was playing games and that its primary vehicle for risk management, LJM, was levered to a fall in Enron's price. Everyone should have been able to figure that if the major risk to Raptor, just one of many partnerships that LJM was invested in, was a decline in Enron's stock to $48, there must have been other partnerships that could be rocked if Enron's stock fell.
Put simply, if I had been at this meeting I know what I would have done; I would have been shorting the heck out of Enron the moment it got near $48 and judging by the stock, I would have made a fortune. Of course, when the stock hit $48, Skilling quit. What a coincidence!
What burns me up is that anyone in LJM had inside information that Enron could be in free-fall if it hit $48. Anyone not in LJM didn't know that.
If any of these institutions in attendance were short Enron at that price, I think you could argue that they had inside information.
I bet some of these institutions made billions shorting Enron when it got to $48, just billions.
What a lay-up trade.
And an illegal one, in my eyes |
