October 18, 2002
 

Top Trader for Enron Admits To Fraud in California Crisis

By REBECCA SMITH and JOHN R. WILKE
Staff Reporters of THE WALL STREET JOURNAL

The former head of Enron Corp.'s Western energy-trading desk admitted he conspired to manipulate California's electricity market and extract illegal profits for his employer, giving federal prosecutors a valuable witness who will help them develop cases against executives at Enron and other big energy-trading companies.

Timothy Norris Belden, 35 years old, pleaded guilty to a single count of wire fraud. He told U.S. District Judge Martin Jenkins in San Francisco that he helped devise "schemes" to manipulate the California wholesale-electricity market from when it was first deregulated in 1998 until Enron's collapse in December 2001, "because I was trying to maximize profit for Enron." In doing so, he said he deliberately submitted false data to the state's electric-grid operator and to the organization that ran the daily power auction. The meltdown of California's power market in 2000 and 2001 and its cleanup could end up costing the state's consumers $80 billion or more.

Prosecutors say that Mr. Belden, who has agreed to cooperate, can potentially provide them with a road map on how big energy firms sought to extract illicit profits from the California market, as well as to clarify the role allegedly played by top Enron executives in executing the strategy. Among them: former head of Enron trading Greg Whalley, who briefly served as Enron's president before the firm sought bankruptcy protection in late 2001, and Enron's former chief executive, Jeffrey Skilling, who denied before Congress that Enron had sought to manipulate California's energy market.

CRIMINAL CHARGES
Read the charges
1 filed against Timothy Belden, by arrangement with FindLaw (www.findlaw.com2)

In Washington, Deputy Attorney General Larry Thompson called Mr. Belden "a central actor" in the trading operations that produced most of Enron's profits after 1998, and stressed that the government's probe into that area "is active and ongoing." Until now, the government's criminal investigation has largely been focused on Enron's use of off-balance-sheet partnerships to illegally bolster profit and hide debt. That investigation has resulted so far in a plea arrangement by former Enron Managing Director Michael Kopper and a criminal complaint alleging fraud against Enron's former chief financial officer, Andrew Fastow.

Still, Enron's role in California's market meltdown has been under scrutiny for some time, with the Federal Energy Regulatory Commission and the Commodities Futures Trading Commission both conducting probes. Action on this front ratcheted up several weeks ago when a federal grand jury was empaneled in San Francisco. The case against Mr. Belden marks the first time since state electricity markets were deregulated in 1998 that the federal government has brought criminal charges against a trader for breaking rules of new markets. It also indicates that federal prosecutors may now be willing to intervene in situations where market authorities complain they have been hamstrung by the lack of punitive powers, such as in California.

If Mr. Belden's cooperation proves valuable to prosecutors, they have said they will seek a lighter sentence for him than the five-year imprisonment and $250,000 fine permitted under the law. As part of the plea agreement signed Thursday by Mr. Belden, he will forfeit $2.1 million, "which is a percentage of the compensation traceable to the compensation he received from implementing the trading schemes," said Assistant U.S. Attorney Matthew Jacobs, who helped bring the case.

The case against Mr. Belden was initiated four months ago, shortly after Enron released a series of memos that showed the firm had devised trading strategies with names like "Get Shorty" and "Death Star" that showed the company had sought to profit dishonestly from California's fledgling deregulation scheme. One strategy, for example, called for Enron to submit energy-supply schedules that would have created bottlenecks on the state's high-voltage transmission system, if carried out. In order to prevent actual "congestion," the ISO was forced to change supply schedules in a way that generated extra fee income for Enron and extra expense for others.

Mr. Belden, a former researcher at a federal energy lab, went to work for Enron after it bought Portland General Electric Co., a regional utility located in Portland, Ore., in 1997. According to former colleagues, Mr. Belden worked hard at uncovering regulatory loopholes and was the brains behind many of the trading strategies for exploiting them. Under his leadership, Enron's revenue from energy trading in the Western states rose from $50 million in 1999 to $800 million by 2001. Although it's unclear how much money Enron made from these trading strategies, the firm's overall electricity-trading profit soared to $1.8 billion during 2000 and 2001. According to Enron records subpoenaed by a California Senate committee investigating the state's electricity crisis, Mr. Belden met or dined with Mr. Whalley and Mr. Skilling on several occasions while he headed the Western trading unit.

Mr. Skilling's attorney, Bruce Hiler, said that Mr. Belden's plea doesn't involve Mr. Skilling. "There's already been testimony before Congress by Enron attorneys that demonstrates that my client wasn't involved in any of this," Mr. Hiler said. Mr. Whalley didn't return calls to comment Thursday night. Zachary Carter, Mr. Whalley's attorney, said that his client has "cooperated with every government agency that has had an interest in this matter from Congress to the Securities and Exchange Commission, CFTC, FERC and law-enforcement officials."

It is possible Mr. Belden's testimony could also implicate executives at other energy companies that were Enron's main trading partners in the California market. Several of the nation's big energy companies own power plants in California, including Duke Energy Corp., Dynegy Inc., Reliant Resources Inc., AES Corp., Calpine Corp. and Mirant Corp., and were Enron trading partners. All of these firms have denied manipulating power prices in California.

The guilty plea doesn't have any direct impact on Enron, though it probably will be used by plaintiffs attorneys who are pursuing shareholder claims against the company. It may also bolster California's demand that any windfall profits be returned to it via a federal order. The state stepped in to assume energy-buying duties, on behalf of the state's insolvent utilities, in early 2001, and racked up billions of dollars of debts that it will be repaying for 20 years.

Mr. Belden moved from Enron's employment to UBS AG's UBS Warburg, when the banking company bought Enron's trading operations early this year, but he left UBS in September. Mr. Whalley, Mr. Belden's former boss, remains head of those operations.

Write to Rebecca Smith at rebecca.smith@wsj.com4 and John R. Wilke at john.wilke@wsj.com5

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Updated October 18, 2002 12:07 a.m. EDT