When Andrew Fastow set out to burnish Enron Corp.’s financial results while hiding its liabilities, he didn’t do it alone. He needed a lieutenant to carry out the financial schemes that would ultimately prove Enron’s undoing.
Now, as details of the company’s inner workings emerge in congressional hearings, Enron documents and court filings, it increasingly appears that Fastow’s man was Michael Kopper.
Kopper was until recently so obscure a figure that veteran stock analysts didn’t know who he was and Enron’s outside attorneys misspelled his name in a report in October.
But public records now show that Kopper played a key role in the controversial partnerships–run by Enron’s officers but treated as separate entities–that led to Houston-based Enron’s bankruptcy filing in December.
It was Kopper who was tapped in 1997 by then-Chief Financial Officer Fastow to head a partnership called Chewco Investments, which added hundreds of millions of dollars to Enron’s profits and hid similar amounts of debt. If Fastow himself had managed the partnership, his role would have required disclosure in the company’s financial filings and raised warning flags for stock analysts.
It was Kopper who, along with Fastow, solicited a handful of Enron insiders in 2000 to invest in another partnership–this one named for Southampton, the historic Houston neighborhood where Fastow and Kopper lived along with other Enron executives. The secret deal paid out spectacular returns to the employees, some of whom represented Enron in transactions in which Fastow and Kopper sat across the table.
And it was Kopper who helped his boss, Fastow, run LJM2, a $394 million partnership named for Fastow’s wife, Lea, and two children. Last year, trying to avoid disclosure of his financial interest in the venture, Fastow sold his holding to Kopper.
Along the way, Kopper reaped hefty rewards, including millions of dollars in fees to manage various partnerships and a $905,000 severance payment when he left Enron last summer.
His big payout, however, came on Chewco: a return of $10.5 million last year on a $125,000 investment in 1997.
This was “an unauthorized and unjustifiable financial windfall to Kopper,” according to a report last month by a special committee of Enron’s board. Kopper, the report noted, “received most of these benefits–by coincidence or design–shortly before he purchased Fastow’s interests” in LJM2 and a predecessor partnership.
Fastow insisted that the amount be 10 times what another Enron executive recommended, according to the report and congressional testimony.
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It remains unclear why Kopper received the windfall and whether any of it found its way back to Fastow. Within Enron, it was rumored the money was used to buy out Fastow’s LJM interests, according to documents released last week by the House Energy and Commerce Committee, which has been investigating Enron’s woes.
Representatives for Kopper and Fastow declined to comment. Like Fastow, Kopper cited his right against self-incrimination and declined to testify before the House committee earlier this month.
But public documents and interviews show that Kopper marched in lockstep with Fastow. “There’s a clear indication of a very close relationship,” said Rep. Billy Tauzin (R-La.), chairman of the committee.
Enron insiders said Kopper helped carry out ideas that Fastow came up with to keep the company growing without putting any more debt on its balance sheet.
“Michael was the guy who would push to get the deal executed,” including recruiting other Enron employees to work for the partnerships, said one Enron executive. “Michael would assemble the team on behalf of Andy–the outside counsel, the in-house accounting.”
Enron’s former treasurer, Jeffrey McMahon, told the board committee that Kopper had received a large bonus because he had “worked closely with Fastow.” McMahon said his own bonus had suffered because he raised objections to the partnerships.
Kopper and his domestic partner, William Dodson, a former finance executive at Continental Airlines, recently sold their Southampton house to Fastow’s parents. Joan and Carl Fastow financed the purchase with an $850,000 loan from their son Andrew, according to Texas land records.
Pair maintained dual roles
Like Fastow, Kopper had dual roles at Enron and the partnerships that created glaring conflicts of interest. Although both worked for Enron, they at times muscled Enron colleagues on behalf of the partnerships in which they held stakes, documents and testimony show.
For example, a top Enron attorney, Jordan Mintz, told a House Energy and Commerce investigations subcommittee that Kopper had sought to obtain non-public information from Enron on a deal involving LJM2.
“So he was trying to get you to give him inside information … so he could be better positioned to negotiate his deal for himself?” Tauzin asked.
“One could draw that conclusion,” Mintz replied.
In another instance, an Enron negotiator complained that Fastow, his supervisor, pressured him to accept terms offered by Kopper in connection with profits paid to Chewco, according to Enron’s board report.
“Enron’s negotiator told us he was uncomfortable with this discussion and Fastow’s intervention, and believes that Enron could have improved its position if he had been permitted to continue the negotiations,” the report said.
While Enron’s partnerships were problematic, the use of off-balance sheet ventures was nothing new in the energy industry. Such partnerships allow energy companies to share the cost and risk of investments such as pipelines and power plants with outside investors.
Keeping these investments separate frees the companies’ books of debt from assets that would take years to show healthy returns. If the debt were left on the balance sheet, it would hurt credit ratings and increase financing costs.
Accounting rules require that such “special purpose entity” partnerships follow certain guidelines in order to be treated as separate ventures. Independent owners must put up at least 3 percent of the capital and bear both risks and rewards of ownership.
Beginning with Chewco in 1997, Enron started using its own employees to partly own and run its partnerships. The board’s report depicted many of the key partnerships as devices used to do deals “designed to accomplish favorable financial statement results, not to achieve bona fide economic objectives or to transfer risk.”
Chewco served as a blueprint for Enron’s dealings with other partnerships. It was set up to allow Enron to buy out the investment of the California Public Employees’ Retirement System in a $1 billion Enron venture called Joint Energy Development Investment, or Jedi.
To keep the deal off its balance sheet, Enron needed a new entity to purchase the California pension fund’s interest. Fastow initially proposed that he would participate in the new entity, Chewco, but the plan hit a snag when Enron’s attorneys told him that his involvement would require disclosure in the company’s proxy statement.
Instead, Fastow brought in Kopper, a New York native with an economics background who had joined Enron in 1994 after working at Toronto Dominion Bank. Because Kopper wasn’t a senior officer, his role didn’t require public disclosure.
Skilling OKd Kopper’s role
Enron’s ethics code required that Kopper’s involvement in Chewco be approved by Kenneth Lay, then the company’s chairman, but Lay has said he doesn’t know Kopper and was never told that Kopper would manage Chewco. Jeffrey Skilling, then Enron’s president, told the board committee he approved Kopper’s role on Fastow’s recommendation.
From the start, however, there were concerns within Enron about whether Chewco was really independent, according to the Enron board’s report. Apparently to ease these worries, Kopper shifted part of his interest in Chewco to his domestic partner, Dodson.
But a bigger problem involved Chewco’s funding. With Fastow unable to find outside investors, the $383 million transaction to buy out the California pension fund had to be financed by bank loans. To meet the 3 percent requirement for outside capital, Kopper put in $125,000. The rest of the equity, $11.4 million, came from Barclays Bank.
Barclays, however, insisted that its contribution be backed by $6.6 million in cash collateral; the payment, approved by Enron and Kopper, came from Jedi. The arrangement, according to the report, meant that Chewco didn’t have close to 3 percent of its equity at risk.
The Chewco deal allowed Enron to keep $700 million in Jedi-related debt off its books. The discovery of the accounting problems last fall forced Enron to record the debt on its balance sheet and to reduce its earnings by about $400 million going back to 1997.
One of Jedi’s investments consisted of Enron stock. Although accounting rules generally bar companies from profiting on increases in their own stock, Enron recorded $126 million in such income in the first quarter of 2000, the report said. When the stock later declined, the losses didn’t show up on Enron’s books.
Why Enron and its auditors at Chicago-based Andersen permitted Chewco to go forward is a key issue in continuing civil and criminal investigations of Enron. Andersen officials have said they didn’t learn of the Barclays funding until last fall.
From December 1997 through December 2000, Kopper collected about $1.6 million in fees relating to Chewco, according to the report, even though “Chewco apparently required little management.” Fastow’s wife also did administrative work for Chewco, though it’s not clear whether she was compensated for her services.
Fastow, McMahon at odds
When Enron disbanded Jedi, McMahon proposed buying out Chewco’s (and therefore Kopper’s) interest on terms that would give Chewco a return of $1 million, according to the report and congressional testimony. Instead, Fastow insisted on boosting the amount to $10.5 million in a deal last March.
Fastow told the board committee he didn’t participate in the negotiations, but the committee said his assertion was “contrary” to the evidence. Months after the deal was completed, Enron also agreed to cover Chewco’s $2.6 million tax bill–at Fastow’s urging and over the objections of Mintz, the Enron attorney testified.
Enron’s dealings with Chewco set the stage for its activities with the LJM partnerships, which were created in 1999 and managed by Fastow with help from Kopper and other Enron employees. LJM2 involved dozens of outside investors, including investment banks, pension funds and even Chicago’s John D. and Catherine T. MacArthur Foundation.
The board report describes how the LJM entities were used to improve Enron’s reported financial results through transactions that essentially were shams, such as selling Enron assets to the partnerships before the end of an accounting period and buying them back just months later.
Enron also used the LJM ventures to hedge its risk on certain assets, such as investments in start-up companies, against the value of its own stock. Some of these transactions collapsed when the value of the investments and Enron’s stock price dropped at the same time.
Nevertheless, Enron insiders made millions of dollars in secret profits on transactions connected with the LJM partnerships, according to the report. Fastow, for example, made about $30 million from the partnerships.
Fastow and Kopper also offered a handful of other employees the chance to invest in the Southampton Place partnership, which had dealings with one of the LJM entities.
Kristina Mordaunt, an Enron lawyer, told the board committee that Kopper brought her into the deal, which returned $1 million on her investment of $5,800 in a matter of months. The report said Fastow collected $4.5 million on a $25,000 investment, but the committee wasn’t able to find out about Kopper’s returns on the deal.
Before last fall, Enron had disclosed in its financial filings that Fastow was running the LJM entities but it didn’t indicate the amount of his compensation. Mintz testified that he hired a prominent Washington law firm to review whether the disclosure was adequate.
But Fastow found another way out of the dilemma: Last summer he sold his interests in the LJM entities to Kopper, who left the company to run them.
Now, as federal investigators pore over Enron’s records and Kopper has been named in numerous lawsuits filed by company shareholders, Kopper and a handful of former Enron employees continue to run something called LJM Investments.
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They work out of a white-carpeted office suite inside a modest, 14-story building, overlooking a carwash and a fortuneteller in Houston.
Effort to oust Kopper
It’s hardly business as usual, however. On Jan. 3, a day after Kopper paid himself his twice-annual fee of $4 million, investors in LJM2 sought to remove him as manager of the partnership. Kopper resisted, telling the partners in a letter last month that he had no plans to step down.
“We intend to continue serving as the general partner of the Partnership with the goal, as always, of maximizing asset value for the partners,” the letter stated.
But on Jan. 15, a Delaware judge ordered Kopper to turn over the partnership’s books and records to a Michigan-based turnaround specialist pending the outcome of a trial, which was scheduled to begin Thursday.
A couple of blocks from LJM Investments’ offices, workers are putting finishing touches on Kopper’s 5,200-square-foot home, which comes complete with a glass staircase. The boxlike contemporary structure is in Avalon Place, an upscale enclave adjacent to River Oaks, where Fastow is building a mansion.
Some Avalon residents, particularly those who lost jobs at Enron, aren’t exactly enthusiastic about their new neighbor.
“I’m just so disgusted with Andy Fastow and all his partners,” said Marie Hejka, a former manager in Enron’s public-relations department. “It’s unfortunate that one of his partners has now moved in down the street, flaunting his unearned wealth.”
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Kopper’s role in the Enron affair
Former Enron employee Michael Kopper helped manage partnerships set up by the company to mask debt and inflate profits. During his tenure with those partnerships, Kopper made millions of dollars.
1994
Kopper joins Enron’s Global Finance division; he later becomes a managing director in the company’s Global Equity Markets Group.
1997
December: Andrew Fastow, the former chief financial officer at Enron, creates a partnership called Chewco Investments. He picks Kopper to run it.
-Kopper invests $125,000 in Chewco. Shortly thereafter, Kopper shifts some of his investment to his domestic partner, William Dodson.
-Between December 1997 and December 2000, Kopper collects about $1.6 million in fees for running Chewco.
2001
March: Kopper negotiates a deal with Fastow in which Enron buys back Kopper’s interest in Chewco for $10.5 million.
July: Kopper resigns from Enron to run LJM1 and LJM2, two other partnerships created by Fastow. Kopper receives a $905,000 severance payment.
2002
January: Investors vote to remove Kopper as manager of LJM2, a day after he pays himself $4 million, half of his annual $8 million management fee.
Jan. 15: A judge orders Kopper to hand over the partnership’s books to a company that specializes in corporate turnarounds. A trial is set for late February.
How one of the partnerships worked
Enron used a series of partnerships to keep debt off the company’s books and boost its earnings. One of those partnerships, LJM1, made millions on a deal concerning a Brazilian power plant.
LJM1 spends $11.3 million
In September 1999, LJM1 buys a share of the Cuiaba, Brazil, power plant project from Enron for $11.3 million. As part of the deal, Enron agrees to provide the plant with natural gas.
Enron books $65 million
Enron books $65 million in income for selling gas futures to the power planto despite the fact the plant still has no access to natural gas today.
LJM1 profit $3.1 million
In August 2001, Enron buys back LJM’s interest in the power plant for $14.4 million oa price that gave LJM1a $3.1 million profit, its maximum return under an agreement with Enron.
Sources: Powers Report, McCullough Research
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