February 8, 2002

Enron Director's Firm Supplied Capital to Fund JEDI Partnership

A company run by one of Enron Corp.'s outside directors and biggest shareholders indirectly supplied money used to fund a 1997 partnership that eventually helped lead to Enron's collapse.

The question of who knew about the final use of those funds is becoming an increasingly important issue to federal investigators combing through the wreckage of Enron, which filed for bankruptcy-law protection in December. Officials at Enron and its former outside auditor, Arthur Andersen LLP, have said the way those funds were ultimately used created, in effect, a giant accounting sham that over four years inflated Enron's earnings by hundreds of millions of dollars and hid similar amounts of debt. These officials say they didn't know the true use of the money until November, the discovery of which triggered a massive financial restatement by Enron.

As much as several million dollars of the funding stemmed from a November 1997 transaction in which Belco Oil & Gas Corp. purchased a stake in another energy company from an Enron-affiliated entity, known as JEDI. Belco's chairman and chief executive at the time was a longtime Enron director, Robert A. Belfer.

Shortly after the transaction, JEDI earmarked some of the proceeds from that deal to help in the creation of a partnership known as Chewco Investments LP, according to a Dec. 30, 1997, internal Enron document. Chewco was one of the partnerships run by Enron executives.

A. Gilchrist Sparks III, a lawyer for Mr. Belfer, said his client was unaware that money from his firm went to help Chewco. Mr. Sparks said the more than $140 million transaction that produced the funds, which involved the purchase of stock in a company called Coda Energy Inc., was a straightforward business deal. As far as Mr. Belfer was concerned, it had nothing to do with Chewco, he said. Mr. Belfer and his family lost an estimated $2 billion on their Enron holdings before the company filed for Chapter 11 bankruptcy-court protection in December. Belco Oil also had other business dealings with Enron over the years, according Enron filings with the Securities and Exchange Commission.

Mr. Belfer took part by telephone in a Nov. 5, 1997, meeting of the executive committee of Enron's board that concerned Chewco, according to minutes of that gathering. He and other directors approved several hundred million dollars in loan guarantees for Chewco after being given a review of the entity's "financing arrangements" and "corporate structure," according to the minutes.

Those arrangements enabled Enron to keep more than $700 million of JEDI-related debt off the company's books. If it recorded the debt on its books, Enron's borrowing ability could have been adversely affected.

Mr. Belfer's attorney, Mr. Sparks, said the Belco purchase of stock from JEDI had been in the works for months and already had been agreed to -- though not completed -- prior to the Nov. 5 meeting. After that meeting, Mr. Belfer "didn't relate" Chewco to the Belco deal with JEDI.

Exactly what was discussed at that Nov. 5 meeting is a potentially crucial piece of the Enron mystery. While the minutes lay out some parts of the Chewco presentation, the remainder is simply covered by the phrase "a discussion ensued."

For Chewco to be deemed independent, which was crucial to the entire exercise, it needed about $11.5 million in equity put in by investors who weren't connected to Enron.

That equity investment ended up coming from two small entities, Big River Funding and Little River Funding. According to a recent report by a special committee of Enron's board, Michael Kopper, the Enron executive who ran Chewco, initially controlled those two entities. On Dec. 18, 1997, he turned ownership in them over to William Dodson, who is described as Mr. Kopper's "domestic partner" in the Enron board report.

Mr. Kopper's attorney didn't return calls seeking comment. Mr. Dodson couldn't be reached for comment. Neither has responded in the past to requests for interviews on Enron's finances.

Little River and Big River obtained almost all of the $11.5 million for the Chewco equity investment by borrowing the funds from one of Enron's banks, London-based Barclays PLC, according to the Enron board report. But in what turned out to be critical development, Barclays demanded $6.6 million in cash collateral before giving the loans.

That $6.6 million came as part of Chewco's share of JEDI's deal with Belco, as well as from a smaller transaction JEDI also did with a another company, according to the Dec. 30, 1997, Enron document. The document was signed by Mr. Kopper on behalf of Chewco as well as another Enron executive on behalf of JEDI. That same day, the money was wired to Barclays on behalf of Little River and Big River, which allowed the bank loans to those two entities to be completed before the end of the year, according to the Enron board report and loan documents.

In recent months, that $6.6 million collateral deposit has become the center of investigative interest concerning Chewco. Top officials at Enron and Andersen, the outside auditor, have said before congressional committees and elsewhere that the collateral arrangement meant Chewco never had enough outside equity "at risk" to qualify as an independent entity. These officials have said they only discovered the existence of this collateral agreement last November, which quickly prompted a massive restatement of Enron's prior four years of audited financial statements.

So one of the pressing questions for investigators is who knew about this collateral arrangement, and its implications for Chewco, and when did they know it. The Enron board report said "many people involved in this transaction for Enron profess no recollection" of the Barclays' loans or the collateral agreement.

"By contrast, others told us that those matters were known and openly discussed. Their recollection is supported by a substantial amount of contemporaneous evidence." The report doesn't say whether any Enron directors or top-level executives might have been privy to such information.

Write to John R. Emshwiller at john.emshwiller@wsj.com⁵

Updated February 8, 2002 12:44 a.m. EST