A Powerful, Flawed Witness Against Enron
October 21, 2002
By KURT EICHENWALD
nytimes.com
he recent plea agreement with a former senior Enron trader presents new opportunities for the law enforcement officials investigating a range of possible crimes at the company. But it also creates challenges for prosecutors that did not exist before.
Under the agreement announced last week, the trader, Timothy N. Belden, pleaded guilty to conspiring with others to manipulate the California energy market during the state's energy crises that began in 2000, and he agreed to cooperate in the investigation of Enron. In his statements to the court, Mr. Belden acknowledged submitting false commitments for energy delivery for the purpose of driving up prices.
Prosecutors now have both a crucial witness to aid in the investigation of trading irregularities, and one who can create paths of inquiry, potentially going further up the line in Enron's management. Already, people involved in the case said, Mr. Belden has provided information to investigators about Enron's broadband unit as well as about its use of huge reserves from its California energy trading to offset losses in other businesses.
But Mr. Belden also arrives with certain baggage as a witness. He is the first crucial witness in the Enron case to have provided statements in the past about his wrongdoing — as far back as three years ago — and presented answers that any clever defense lawyer would use to undermine his accusation of a conspiracy involving others at Enron. At bottom, during those interviews, Mr. Belden has maintained at times that his actions were not illegal and that he, and he alone, was responsible for them.
At issue is the complex system that was adopted by California in 1996 and made operational two years later. The law created two institutions, the California Power Exchange, which served as the primary marketplace for wholesale electricity, and the California Independent System Operator, which was responsible for managing the state's energy-transmission grid. Through those institutions, the energy marketers, including Enron, would schedule deliveries of fixed amounts of electricity to their wholsesale and retail customers.
There were plenty of ways for energy marketers to profit from high demand. If a power line was overcrowded by too much scheduled delivery, a marketer would be paid a "congestion management fee" for rescheduling a delivery or moving power in the other direction. Marketers were also paid for making commitments to deliver standby electricity in the event of a sudden loss of supplies. Then, if generators in the state could not supply the needed power, marketers could sell out-of-state electricity at a higher price.
But the rules seemed to rely on traders not taking advantage of the system — something Enron did, according to the company's records and other documents. It submitted bogus schedules for huge amounts of electricity for delivery, thus creating congestion, then received payments for "relieving" overcrowding that did not really exist. It guaranteed delivery of large amounts of power it did not intend to deliver. And it shipped power out of California, only to ship it back as high-priced "out-of-state" electricity.
By 1999, one year into the new California system — and before the energy crisis hit with full force — Mr. Belden and Enron were already engaged in some of those activities. On May 25, 1999, Enron scheduled for the transmission of nearly 2,900 megawatts of electricity over a line known as the Silver Peak, which was able to carry just 15 megawatts. The power was never sent, but the bogus scheduling caused energy disruptions and higher prices. California opened an inquiry, questioning executives including Mr. Belden.
At that time, Mr. Belden said nothing about a conspiracy or acting on the instructions of others. Rather, according to notes from the interview, Mr. Belden assumed responsibility for the event. "He was the sole party responsible for making the decisions to submit the bids and schedules that led to the event," investigative notes from the interview read.
Of course, the statement was limited to the Silver Peak event, and does not explicitly eliminate possible knowledge of Mr. Belden's actions on the part of others. But legal experts said that such a statement was sure to be an issue in any trial in which Mr. Belden served as a main witness.
"A statement like this would certainly be a priority and a key line of questioning for anyone facing charges resulting from Mr. Belden's cooperation," said Stephen Meagher, a former prosecutor in San Francisco. "Any lawyer would want to get to the bottom of why one transaction was presumably so different from the others in which he is now implicating other senior executives."
Of course, the existence of such a statement does not prove that Mr. Belden was misrepresenting anything; rather, it is simply a piece of evidence that can be used to attack his credibility on the stand. The creation of such problems is one of the reasons lawyers often insist that their clients refuse to testify during a criminal investigation, because they can be locked into an account that later works against them.
Cristina C. Arguedas, a lawyer for Mr. Belden, did not return a telephone call seeking comment.
According to the investigative notes, Mr. Belden submitted the bogus bids and schedules on Silver Peak as an experiment. He told investigators that the effort was "only intended by its actions to make clear to the marketplace that a dangerous loophole existed," the notes say.
Ultimately, California fined Enron $25,000 for its maneuvers on Silver Peak, and its then head of trading, Lawrence G. Whalley, signed an agreement never to repeat such maneuvers. But according to Mr. Belden's admissions last week, that is exactly what Enron did during the energy crisis.
The trading pattern was eventually discovered in 2000 by Enron lawyers, who interviewed Mr. Belden about his strategies. And again, the notes of those interviews, which have been obtained by investigators, provide page after page of additional previous statements by Mr. Belden that could be used to undermine his credibility.
Why would Mr. Belden have been so open in his discussions about potential wrongdoing, when so many others at Enron have refused to speak about the scandal? For one, the interviews took place in 1999 and 2000, before the Enron scandal exploded into public view. Moreover, many traders, Mr. Belden included, seem to have thought that such manipulations were simply clever methods of taking advantage of poor rules, rather than illegality.
But legal experts said, regardless of the regulations in place, obtaining profits through the submission of false documents, as Mr. Belden did, crosses the line into criminal fraud.
"Gaining economic advantage through material misrepresentation doesn't really require regulations to be violated" for a criminal prosecution, Mr. Meagher said. "It's fraud, pure and simple." |
