Chagrined Enron Partners Try to Stave Off Both Losses and Scandal's Taint
By LESLIE WAYNE
The New York Times
March 31, 2002
It is hard to imagine what the Chanel
family of France, teachers in the
state of Arkansas and a group of
well-placed Wall Street executives have
in common. But right now they are all
in the same situation: as investors in
one of the biggest off-the-books
partnerships that helped wreck Enron,
they are now fighting to
salvage their holdings and keep the taint of Enron at bay.
This was hardly the outcome they expected when, back in 1999, Enron was riding
high and & Company was dangling a tantalizing
prospect before wealthy investors - put money into an Enron-related partnership,
called LJM2, and watch it grow by at least 30 percent a year, perhaps even double
in shorter order.
Only wealthy individuals and institutions could invest, and they did. Demand was
so strong that Merrill raised $394 million for LJM2, even though it was seeking
only $200 million. All went according to plan, at first. A steady stream of cash came
to these investors as one LJM2 investment after another scored big, including one
that returned 212 percent in just three months and others earning more than 100
percent.
But the collapse of Enron pulled back the curtain on LJM2 and showed that the
investors, whether knowingly or not, had provided the cash and the cover that
allowed Enron to hide assets and manipulate its finances. Now, the Enron fallout is
beginning to envelop them as well.
"LJM2 seemed to be the brightest star among a number of investment funds we
had seen," said Charles Vondran, vice chairman of the Arkansas Teacher
Retirement System, which had committed $30 million to LJM2 and still has $5
million invested. "It promised a return higher than anything we had seen. Now that
it is splattered across the press, we are beginning to understand the issues."
Many LJM2 investors say they are embarrassed by their
role in a partnership that has come to exemplify the
self-dealing and greed of the Enron scandal. More than
image is at stake, however. LJM2 investors are engaged in
a multifront battle as they try to extract value from an
estimated $80 million in non-Enron-related assets still in
the partnership and distance themselves from the scandal.
For the moment, LJM2 investors are fearful of potential
litigation from Enron shareholders, who are going after
any last pocket of money linked to the company. In
addition, some of the investors - primarily Wall Street
executives and firms - face scrutiny from Congressional
investigators examining Enron's relationship with the
financial services industry. One big question is whether
Wall Street executives were strong-armed by Enron into
investing in LJM2 as a way to help Enron's
behind-the-scenes financial machinations, or whether
Enron gave certain investment bankers who worked with
Enron a sweetheart deal as a reward.
Another battle is being played out in a Delaware court,
where investors have been maneuvering for months to
wrest control of the partnership from Michael J. Kopper,
the former Enron executive who took over as LJM2's
general partner last July from Andrew S. Fastow, then
Enron's chief financial officer and the architect of the
company's off-balance-sheet maze. Late this month, a
Delaware judge affirmed Mr. Kopper's ouster, an
extremely rare move in the world of private equity. While
control of LJM2 has shifted to a management team
selected by the limited partners, the partners remain at
odds with Mr. Kopper over a $3.8 million fee paid to him
that they want returned. Mr. Kopper's lawyer, Eric
Nichols, would not comment.
"There are a limited number of assets in LJM2 that still
have value, and that's what all the fighting for control of the partnership is about,"
said Robert McCullough, an energy industry expert at McCullough Research, a
consulting firm in Portland, Ore., that has analyzed confidential LJM2 documents.
"You would not expect them to fight over a profitless undertaking."
While many Enron-related assets with names like Osprey and Whitewing are
worthless, LJM2 has such other valuable non-Enron assets as a large stake in
Northern Border Partnership L.P., which owns a natural gas pipeline linking the
United States and Canada.
Even though the LJM2 investors have gotten the bulk of their money back, they
still have millions at stake - and whether that money will be lost in litigation or
recouped through asset sales remains an open question.
For their part, many LJM2 investors cite a confidentiality agreement in declining to
speak openly. But few, in any event, see a reason to draw attention to their role in
financing a partnership that made money, in part, by buying Enron assets at low
prices, selling them back to Enron at higher ones and pocketing the difference for
themselves and Enron executives. Among the assets run through LJM2 were a
Polish power plant and a Gulf Coast natural gas operation.
"It's horrifying to see what has happened," said one LJM2 investor, who insisted on
not being identified. "Investors in LJM2, at best, look like fools. At worst, we look
complicit, and I hope that neither is the case. A lot of us would love for this to go
away. Frankly, it's been a nightmare."
A total of 51 limited partners are listed on partnership documents, and most are
either groupings of executives from Wall Street firms that did business with Enron,
private money management firms or wealthy clients of Merrill Lynch.
Merrill, which was one of the biggest underwriters of Enron stocks and bonds, was
the placement agent for the partnership. The firm got the assignment after Enron
was turned down by Donaldson, Lufkin & Jenrette, which cited its discomfort with
the conflicts of interest inherent in the partnership. D.L.J. objected to the fact that
Mr. Fastow would be the general partner of LJM2 while remaining a top Enron
executive - a position that put him on both sides of the negotiating table as assets
were traded back and forth between the partnership and the company.
In the end, a group of 96 Merrill Lynch executives invested $16.6 million of their
own money in LJM2, and Merrill put in an additional $5 million for its own
account. One Merrill broker, Louis Chiavacci, invested $1 million in his own name.
Though D.L.J. passed on being placement agent, its executives put in $5 million.
Two firms that arranged lines of credit for LJM2, Dresdner Kleinwort Wasserstein
and Credit Suisse First Boston, both made investments for themselves or their
executives: $5 million by Dresdner and $10 million by Credit Suisse. (Credit
Suisse subsequently acquired D.L.J.)
Other financial firms taking limited partnership stakes were J. P. Morgan Chase
(news/quote) ($25 million), Lehman Brothers (news/quote) ($10 million), Citicorp
(news/quote) ($10 million) and the American International Group (news/quote)
($30 million).
Many of these firms also provided investment banking services to Enron, and that
confluence of facts has raised questions in Congress about Wall Street's myriad
dealings with the company. Lawmakers are examining whether Wall Street firms
with stakes in LJM2 kept inside knowledge of Enron's deteriorating finances from
their brokerage customers, along with the role Wall Street played in structuring
and marketing Enron's partnerships.
"Some of the partnership deals were too good to be true and, as it turns out, they
were," said Ken Johnson, spokesman for the House Energy and Commerce
Committee, which is investigating Enron, adding that LJM2 is "hugely important"
in the investigation.
Merrill Lynch, the only investment firm that would comment, defended its role in
LJM2. "We placed this privately with a limited number of sophisticated institutions
and high-net-worth investors who received full disclosure about its structure and
potential risk," Bill Halldin, a Merrill spokesman, said. "We did not create or
manage the partnership."
Merrill Lynch was anything but shy in promoting LJM2. One pitch that resonated
with investors was the mention in offering documents that an earlier partnership
between Enron and the California Public Employees' Retirement System had
internal returns of 194 percent. Mr. Fastow's dual role was marketed as an
advantage that gave LJM2 investors a ringside seat on Enron deals.
"Merrill's marketing gave LJM2 real legitimacy," said David Snow, a spokeman for
PrivateEquityCentral .net, a trade publication. "Merrill has golden contacts in the
institutional world."
Some investors agree that it was Merrill's backing that prompted them to write
checks. "It's a minor piece of our portfolio, and we could have done better due
diligence," said George Follini, a spokesman for Mousseteek Free, the investment
fund for the Chanel family. "But you've got Merrill Lynch saying they are behind it.
What are you going to do?"
A number of LJM2 investors are rueful today. One of them, an institutional
investor, said he put money in LJM2 as part of a larger energy portfolio and
expected annual returns of 20 percent to 30 percent. Immediately, the returns
exceeded expectations as nearly half of the deals returned cash the first year -
compared with a more typical period of several years.
"Some deals were very quick," the investor said. "It was phenomenal."
Yet rather than investing in the "plain vanilla" deals this investor expected, LJM2
put money into deals of exceptional complexity - for instance, the "Raptor" deals
that Enron used to hedge against declines in its technology investments. Though
the hedges ultimately failed, the deals provided returns to LJM2 investors ranging
from 193 to 2,500 percent. By the time this institutional investor looked into these
arrangements, Enron had collapsed.
"We are really, really sorry we invested in LJM2," the investor said. "We thought we
had full information. This was supposed to be a win-win-win situation. Good for the
company. Good for the shareholders. Good for the partnership. But I have no idea
who the winner is here."
Other LJM2 investors include Leon Levy, former chairman of Odyssey Partners, a
once-successful hedge fund, who was part of a group putting in a total of $12
million. An additional $5 million came from the Institute for Advanced Study at
Princeton, N.J., where Albert Einstein once worked and where Mr. Levy is the
board's vice chairman.
Wealthy individuals in LJM2 include Robert D. Basham, the president of Outback
Steakhouse (news/quote), Eugene Conese, a Florida businessman, and Joseph
Marsh, a producer for the magician David Copperfield, each with $3 million.
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