Enron and Special Purpose Entity (SPE) Vehicles

Enron found itself with the need to employ SPEs as a result of Jeff Skilling’s Gas Bank. In the late 1980s, Skilling had spotted a way to arbitrage the natural gas market. Skilling noticed that gas users would pay premium prices to secure long-term supplies at fixed prices. Customers would pay this premium precisely because natural gas producers were not then willing to sell long-term, fixed-price gas.

Skilling, however, spotted the fact that producers also couldn’t find financing to drill for new reserves. Texas banks had taken a licking in the oil bust of 1986; those still operating were loath to back drilling for natural gas when spot prices were below $2/MBTU. Skilling saw that by offering producers financing, Enron could persuade them to supply term gas at fixed prices. Enron then resold the same volumes to utility and industrial customers at a premium, pocketing the difference.

One problem with this nifty scheme was that Enron didn’t have much money to lend. The company’s lackluster financial performance had combined with a heavy debt burden to produce a borderline investment-grade debt rating. Most of the time, Enron sported a Baa or Baa– rating from Moody’s and a comparable S&P rating. On a couple of occasions, downgrades dropped Enron below investment grade. Indeed, Ken Lay had spent considerable time consorting with Mike Milken, the junk bond king, in an effort to keep Enron liquid.

Skilling needed more funding to make the Gas Bank work. Eventually, he thought, Enron might be able to get it by securitizing the loans it made to producers. Skilling brought in Andy Fastow, a structured finance specialist from Continental Illinois Bank, to test out the idea. Fastow’s first effort was called Cactus and it was a success.

The basic idea behind Cactus was to pool a group of producer loans and sell them off to investors. By pooling the right combination of loans, an aggregate cash flow could be created that resembled a large conventional loan. Enron’s version of these producer loans involved something called a Volumetric Production Payment (VPP); under this type of agreement, gas producers committed to deliver physical natural gas, not cash, to repay their loans. Enron’s challenge was to monetize this physical product stream so that the investors got repaid in cash.

Fastow’s structuring approach was to sell the pool of loans and associated VPPs into an SPE created expressly for the transaction while simultaneously selling the SPE to investors. These connected sales generated cash that reimbursed Enron for its prior loan to gas producers. Enron then contracted to repurchase the physical gas over time from the SPE. Enron’s payments thus provided the cash that the vehicle needed to pay its new owners their investment return.

Looking through the arrangement, the SPE’s investors were funding Enron’s producer loans and getting repaid by Enron. However, Enron’s payment obligation was embedded in a sales contract rather than a debt instrument. Moreover, the arrangement was secured by the SPE’s right to receive physical gas from the producers. Accordingly, the deal was not booked on Enron’s balance sheet as a debt obligation. Instead, it was treated as a sale of partnership interests and a purchase of physical gas.

This accounting treatment also ensured that Enron could grow the Gas Bank without adding debt to its balance sheet. Once Cactus was up and running, it would borrow on its own to buy new VPP loans originated by Enron. In this way, Cactus became an ongoing fund-raising center for the Gas Bank. Attachment 1 outlines the Cactus SPE structure and cash flows.

Cactus was a success for several reasons. First, Enron wanted to be in the natural gas trading business rather than the financing business; making loans was simply a means of attracting the supplies it needed to put together the rest of the package. Cactus enabled Enron to accomplish this without further burdening its already leveraged balance sheet. Second, Cactus worked technically and for solid reasons; the vehicle and all its debt were considered to be the property of its owners and not of Enron. Its owners were substantive investors, a list that included GE Capital. Its management was independent and looked after the interests of its owners. The pricing of Enron’s VPP sales into Cactus was a market price negotiated among independent parties. All this was possible because the margins available to Enron on the gas arbitrage were robust. Said differently, Enron could extract a sufficiently low purchase price from the producers so that it could let the owners of Cactus earn acceptable returns on their VPPs and still clear an attractive margin when Enron bought back/resold the gas to the ultimate customers. So long as producers couldn’t get loans and customers couldn’t get long-term, fixed-price supplies elsewhere, Enron could afford to pay real returns to real third parties.

Shortly after Cactus got going, a similar deal literally fell into Enron’s lap. By 1993, Enron was seeing increasing competition from the banking community. VPP deal flow was starting to dry up. Fortunately, a household name investor, the California Public Employees’ Retirement System (CalPERS), was impressed by Enron’s creativity. CalPERS contacted Fastow, proposing a deal. CalPERS indicated that it was willing to invest $250 million in a joint venture to be run by Enron. The idea was for Enron to contribute comparable capital and to use the combined proceeds to make energy loans and acquisitions.

Fastow eagerly seized the opportunity and developed the Joint Energy Development Investments (JEDI) partnership. In the structure ultimately implemented, Enron contributed $250 million of its stock to match CalPERS’ cash. This gave each partner a 50 percent stake. Fastow then had the venture borrow $500 million; this capitalized the partnership with $750 million in cash to invest. Over the next several years, JEDI did exactly that, making a series of loans and acquisitions, most of which turned out well.

Before the end of 1997, CalPERS indicated that it wanted to sell its share of JEDI in order to invest in another Enron deal. Enron then estimated that the value of CalPERS’ JEDI stake had climbed from the original $250 million to $383 million. Attachment 2 details the JEDI structure and some of the merchant investments made.

Like Cactus, JEDI also worked. Enron had a real partner in the form of CalPERS, and its deals were done with other third parties that looked after their own interests in the various negotiations. Consequently, JEDI qualified as a deconsolidated subsidiary of Enron. As such, JEDI’s debts were not combined with those of Enron on Enron’s published balance sheet.

Things began to change shortly thereafter. Enron’s financial team started to view structured financings as an open-ended arena for creative development. Fastow and his team were widely praised for Cactus and JEDI. Skilling and others were interested to see what else they could dream up. This context coincided with the emergence of a real problem for Enron: The company’s business strategies were voraciously consuming capital. Giant international power projects, such as Teesside and Dabhol, cost billions of dollars and took years to build before any cash flowed in. When problems occurred, as they did at Dabhol, the cash hole just got deeper. Acquisitions also required major cash outlays. Enron bought utilities in Brazil, Argentina, Columbia, and the Philippines. It also bought Portland General in the United States. Meanwhile, Enron’s handsome reported profits were not bringing in comparable cash flow. Mark-to-market accounting was making Enron look like a profit machine. However, Enron’s financial reality was one of producing negative net cash generation year after year.

This reality meant ongoing pressure on the finance team to fund the deficit with new financing. Insiders called this “Feeding the Beast.” This basic challenge then combined with a second, more complicated one: How could Enron keep raising new capital without scaring off its existing lenders?

In fact, even at the peak of its success, Enron was a fragile financial entity. This fragility had many contributing causes, the four most important of which were:

1. A starting position characterized by a lower investment-grade debt rating.
2. The dependence of its lucrative trading business on maintaining an investment-grade rating, so as to avoid having to cash collateralized trades—this meant Enron had little maneuvering room. It could ill afford to “leverage up” and temporarily surrender its investment grade rating.
3. A reluctance to scale back new investment to levels more in line with actual cash generation.
4. Poor internal cost control in many business units.

These four points combined to constrict Enron’s financial flexibility. Enron didn’t generate the cash needed to pay for its investments, it didn’t have the balance sheet room to finance the shortfall, and it didn’t dare give up its investment-grade rating for fear of strangling its lucrative trading business.

Enron sought to solve this conundrum by presenting a relentlessly positive profile to the capital markets. Hitting quarterly earnings targets became a necessity. Maintaining Enron’s image as the generator of brilliantly conceived investment opportunities was equally important. Difficulties and failures, if acknowledged, would invite unwelcome doubts from rating agencies, analysts, and lenders. Step by step, Enron developed a deep commitment to managing the information it shared—and didn’t share—with investors. As part of managing its information, Enron worked harder to keep the full extent of its indebtedness from appearing on its balance sheet.

This called for less straightforward ways to feed the beast. These methods would have to put cash in Enron’s coffers but not be identifiable as debt or as an obvious “debt equivalent.” Enron’s next favorite tool of choice became the “Prepay” (Attachment 3). This transaction was designed to be treated as a set of commercial transactions: one a forward sale of gas; the other, a forward purchase. However, the timing of payment was different for the two sides of the deal. For the forward sale, Enron would collect a discounted cash lump sum up front. On the forward purchase, Enron would pay the supplier over time. Netting out the two transactions, the surviving cash flows resembled a loan: cash received upfront and repaid with interest over time. However, because these flows were tied to underlying commodity transactions, Enron chose not to net them out; the “loan in substance” thus remained disguised. Enron booked the forward sale as revenue; the forward purchase went on the balance sheet as an account payable. Neither transaction entered into traditional measures of indebtedness, such as interest coverage or debt/total capital. Enron did many of these Prepays, usually to bolster reported cash generation prior to financial statement dates.

A further expansion in the use of SPEs came with the 1997 Whitewing transaction (Attachment 4). This deal started as a way of raising some $1 billion in new debt and then having this financing “converted” from debt to equity. In reality, however, the conversion was more accounting optics than substance. In Step 1, Enron’s treasury borrowed $579 million from Citibank and set up Whitewing Investments, an SPE partnership. Whitewing then borrowed another $500 million, also from Citibank but funneled through a bank-controlled SPE. Enron next assigned to Whitewing the debt it owed to Citibank but leaving an Enron guarantee in place. Enron then delivered $1 billion of new-issue preferred stock to Whitewing, receiving in return $420 million of the cash that SPE partnership had raised from Citibank.

The net effect of these back-and-forth flows was as follows:

• Enron raised ~$1 billion in cash.
• Enron’s new debt and preferred stock were now lodged in a severable SPE, along with another $500 million of subsidiary debt.
• All the $1,079 billion in debt would be off Enron’s balance sheet and onto that of the now “stand-alone” SPE. Enron would retain a guarantee on the $579 million, but that would be consigned to a financial statement footnote if it appeared anywhere at all.
• What would show on Enron’s balance sheet was the issuance of $1 billion of preferred stock to a third party and the cash it received in return. From an accounting perspective, it would appear that Enron had completed a private placement of preferred stock to an outside investor.

Fastow’s team accomplished this accounting severance by having outside investors contribute a sliver of equity to Whitewing. Early in Fastow’s career, Arthur Andersen had advised on the conditions required for an SPE to be viewed as independent.

• At least 3 percent of its total capitalization had to come from genuine third parties.
• Management decisions at the SPE had to be in independent hands.
• Enron could not agree to compensate the SPE for its losses.¹

Examined from another perspective, these rules implied that 97 percent of the capitalization of an SPE could come from the party with which the vehicle would be doing business. Upon hearing this, Fastow reportedly had been incredulous. Supposedly, Fastow commented that his gardener could probably raise the 3 percent equity required to create an independent entity.²

Although the equity in Whitewing was small in dollar terms, it was crafted to exceed Enron’s equity in that vehicle. Thus, the net effect of outside investors putting up a sliver of equity was to convert Enron’s Whitewing stake into a minority interest. Whitewing’s assets and liabilities then disappeared from Enron’s balance sheet, taking all the Citibank loans along with it. Enron did disclose Whitewing in its financial statements but as a minority-interest entry that showed up in Enron’s equity accounts. Debt had indeed been converted into equity through the mechanism of selling preferred stock to a debt-laden affiliated entity and then severing that SPE from Enron for accounting purposes.

Creative as Whitewing may have appeared, it was open to the allegation that the vehicle’s sole purpose was to mislead outside investors. What substance was there to the transaction? With Whitewing, Citibank made a guaranteed loan to Enron and another loan to a subsidiary whose principal asset was Enron preferred stock. Yet Enron booked this transaction as if it had made a minority interest investment in a third-party company. Enron’s appearance and reality were getting farther apart.

Enron later answered the Whitewing substance issue, although not in the most straightforward way. Enron had Whitewing buy over $1 billion in assets from various Enron businesses.

A further “step-out” occurred with the RADR transaction, a small deal that used financial engineering similar to Whitewing. The business problem here was straightforward. Early in 1997, Enron had acquired the Zond Company, an owner of wind farms. Zond’s wind farms qualified for federally mandated benefits, including higher prices on electricity sold to utilities. To maintain these benefits, Zond could not be more than 50 percent owned by an existing utility. That was not a problem for Enron when it acquired the company. Later in 1997, however, Enron bought Portland General, an electric utility. With this acquisition, Enron became a utility for regulatory purposes, and thus Zond would no longer qualify for its special benefits.

Enron’s solution was to divest 50 percent of Zond into an SPE that would be independent for regulatory purposes but that Enron would still control economically. Attachment 5 describes the structure used and the associated cash flows. Only $17 million—50 percent of the valuation placed on Zond—was involved. Raising 3 percent of this sum as independent equity was not a daunting task.

The actual raising of this equity had first proved problematic, then mysterious. Andy Fastow’s original approach had run into trouble with Enron’s accountants and lawyers. Fastow had formed an investor group, Alpine Investors that included a personal friend, Patty Melcher, Fastow’s wife’s family, and themselves. The accountants and lawyers indicated that the involvement of Enron executives and family members would not meet the independence requirement. Alpine Investors, as originally devised, didn’t work.

Then things got murky. Patty Melcher and the Fastow family disappeared from the deal. Two entities—RADR ZWS and RADR ZWS MM—were formed to buy Zond (Attachment 5). The owners of record were Kathy Wetmore and Bill Dodson: Fastow’s real estate agent and Michael Kopper’s domestic partner, respectively. Where these owners got the $510,000 needed to reach the 3 percent equity requirement was unclear. Circumstances, however, continued to point to Fastow and Kopper as being involved behind the scenes.

This history formed the backdrop to the Chewco transaction. Enron had certainly mastered the use of vehicles to attract outside capital while insulating Enron’s balance sheet. Increasingly, however, Enron was also using them to disguise its actual financial condition; most recently, it appeared that SPEs were employed as vehicles for the involvement of Enron executives in their own deals. If so, this involvement would contravene express advice from Enron’s deal lawyers and accountants.

Chewco Investments

As he stared at the Chewco documents, Ben was aware that he had been at Enron only a short time. Glisan knew that he was a good, maybe exceptional, accountant. He had graduated from the University of Texas MBA program, earning a 4.0 grade point average in the process. His first job was something special. Glisan was hired as one of only two MBAs brought into a Coopers & Lybrand pilot program. The program’s purpose was to test the concept of combining audit and consulting services for clients regarded as high risk engagements. In 1995, Glisan moved to Arthur Andersen for the chance to work on the Enron account. Late in 1996, he followed the path of other Andersen accountants and joined Enron. Glisan was then thirty years old.

Andy Fastow quickly spotted Glisan. Fastow liked Glisan’s in-depth knowledge of structured-finance accounting rules and his ability to massage them to make deals work. Glisan had spent time at Bank One in between undergraduate and MBA school. Fastow noted that Glisan knew how to discuss deals with bankers and how to present aggressive accounting in the most favorable light. Glisan found himself thrilled to be working at Enron for a well-known figure like Andy Fastow.

This history now made Glisan’s Chewco dilemmas more acute. Crying foul on Chewco’s structure would mean turning against Fastow, his boss and mentor. Glisan knew that Fastow’s immediate reaction would be surprise that Ben was abandoning “creative problem solving.” Fastow was also well known for becoming intensely angry at individuals who objected to his deals. Crossing Fastow would almost certainly produce an instant reevaluation of Glisan and could convert Fastow into an enemy.

“What was the problem with Chewco, anyway? Most of the deal is straightforward enough. CalPERS wants out of JEDI I before investing in JEDI II. There is nothing troublesome about that. The price for CalPERS’ stake also is not an issue. Enron has agreed that CalPERS’ interest is worth $383 million. That is the price Chewco is set to pay, and it is a fair market valuation. CalPERS can hardly complain; at that price it will have earned a 22 percent annual return on its original $250 million investment.

No, the problem with Chewco didn’t lie with these fundamentals. Rather, it lay with what seemed to be a minor detail: the provision of the $11.4 million of independent equity needed to render Chewco independent of Enron for accounting purposes. It was the RADR issue all over again.”

As outlined in Attachment 6, Chewco needed $383 million to buy CalPERS’ stake in JEDI. By December 17, that step had already been taken. In order to assure CalPERS that the sale would occur in 1997, Enron had simply lent Chewco the purchase price in November. Chewco had then paid CalPERS for its share of JEDI. With that piece finalized, the rest of the deal had to be transacted by December 31; otherwise, Chewco and JEDI would be consolidated Enron subsidiaries, and all their assets and, most especially, their debts would show up on Enron’s 1997 financial statements.

Completing the transaction principally meant finding the $11.4 million of independent equity. Here is where the problems began. Most of this money was supposed to come from Barclays Bank. However, Barclays was balking at putting up real equity. It was seeking a more protected return. The current discussion was focused on Barclays’ purchasing fixed-return equity certificates. Would these stand scrutiny as equity? Barclays wasn’t making this issue any easier by also talking in terms of getting some form of cash collateral in reserve accounts to guarantee its investment.

The remainder of the equity money—a minuscule $125,000—was supposed to be provided by Michael Kopper. One reason that Andy Fastow was so confident about Chewco was that he had already pitched the deal to Jeff Skilling on the basis of Kopper both putting it together and being the outside investor. Skilling apparently had been OK with that. However, no accountants or lawyers had been in the room when Fastow and Skilling had this conversation. Moreover, Fastow and Kopper had worked hard to keep the identity of the Chewco investors secret from the lawyers reviewing the deal. One lawyer had asked Kopper for details of the investor group and had been told:

“Enron doesn’t have a right to know more. We’re negotiating for Chewco, but it’s behind a black curtain. You’re not supposed to know what’s there. That’s what all the parties have agreed to.”³

Kopper had structured his part of the deal as follows: the bulk of his “equity,” $115,000, was to be injected into Chewco from an entity, SONR 1, controlled by Kopper. The remaining $10,000 would go into another SPE, Little River Funding (LRF). This entity was to own Big River Funding (BRF). Barclays would lend most of the necessary $11.4 million to BRF, which in turn would purchase Chewco’s equity certificates (Attachment 6). Making sure that Little River Funding was an independent SPE would also keep BRF independent. The document sitting in Glisan’s pile transferred Kopper’s equity in LRF to Dodson.

Glisan knew that having someone like Kopper put up the equity money risked invalidating the deconsolidation of Chewco. It was the same as with RADR; the accountants and lawyers had been very clear that employees of Enron were not sufficiently “independent” to meet the test, and since the invalidation of any part of the 3 percent equity would cause the structure to fail, including Kopper in the deal for any percentage could be a fatal flaw.

Would Kopper’s transferring his interests to his domestic partner change this result?

Ben again thought about the issue of crossing the line. “Was it wrong to dress up Enron’s financial statements? Companies did that all the time. What was so different here? Were any laws being broken?”

Glisan took a deep breath and eyed the document pile anew. “A Kopper/Dodson transfer only highlighted a fundamental point: Having Kopper anywhere in the deal endangered the technical integrity of the transaction. Was now the moment for Glisan to point this out?”

A sinking feeling afflicted Glisan’s stomach. To whom would he point it out? Fastow and Kopper undoubtedly knew and either thought that it was all right or thought these facts would never see the light of day. Pointing out the obvious to them would lead nowhere. Was there anybody else to talk to, someone who could do something about the Chewco deal at this late stage and would not be inclined to “shoot the messenger?”

It is tempting just to let the transaction go forward. Fastow and Kopper are probably right. The details associated with the 3 percent independent equity will probably never come to light. So long as Arthur Andersen signs off on the deal, nobody else will ever dig that deep. After all, the only non-Enron party in the deal with interests to protect is CalPERS, and it is satisfied. Fastow and Kopper act as though they already had Andersen on board for the whole deal.

Ben Glisan seemed to make up his mind. Then he thought again: “What else might be sitting in those documents?”

Attachment 1—Cactus SPE Off Balance Sheet Structure

Deal in Substance

• Enron loans money to Gas Producers in return for a Volumetric Production Payment (VPP), a producer commitment to deliver specified volumes of gas in the future
• Enron sells the Producer loans and VPP to an SPE (Cactus) financed by banks and owned by GE Capital. The cash from selling the VPP allows Enron to recover the funds used to make its loan to Gas Producers
• Enron agrees to purchase the VPP gas at a fixed price over time from Cactus. Enron’s payments will allow Cactus to repay its loans and pay its owner a return.
• Enron agrees to provide long-term gas supplies to industrial customers at a premium price.

Accounting Results

• All financing of gas producers ultimately is on the SPE’s, not Enron’s, balance sheet. Enron records profits on spread between purchase price of VPP gas and sale price to industrical customers.

Attachment 2—Joint Energy Development Investments (JEDI)

Deal in Substance

• Enron and CalPERS have a joint investment in a partnership making merchant investments and loans to energy companies.
• Enron invests stock while CalPERS invests cash in JEDI.
• Enron’s stock investment helps secure borrowings from banks, which proceeds are combined with CalPERS’ cash to fund loans and acquisitions.
• Enron acquires a 50 percent interest in profitable loans and merchant investments without investing any cash or borrowing any money “on balance sheet.”

Accounting Results

• Enron books investment in non-consolidated entity as an asset, equity as a liability.
• Enron books 50 percent of JEDI’s annual profits; later, it will mark-to-market the value of its investment in JEDI, including the increased value of Enron’s stock.
• JEDI investments and borrowings are not on Enron’s balance sheet.

Attachment 3—Mahonia Prepay Structure

Deal in Substance

• Chase’s Mahonia subsidiary pays cash in return for Enron’s commitment to deliver oil/gas over time.
• Enron simultaneously agrees to repurchase the oil/gas delivered to Mahonia.
• The contract price difference between what Enron receives for its delivery commitment and what it pays for the oil/gas repurchases provides Mahonia with the equivalent of payment of interest and loan principal.

Accounting Results

• Enron booked the transactions as prepaid oil/gas sales and oil/gas purchases made over time.
• Enron did not “net” the oil/gas sales/purchases, revealing the loan.
• No debt was thus reflected on Enron’s balance sheet.

Attachment 4—Whitewing Structure

Deal in Substance

• Stage 1: Enron raises $1 billion from a bank but converts it to a minority equity interest in an SPE; $79 million pays return to Citigroup lenders. Outside investors contribute 3 percent independent equity to convert Whitewing into a deconsolidated entity.

Accounting Results

• Stage 1: Enron strengthens balance sheet via booking issuance of preferred stock, while receiving and booking $1 billion cash from Whitewing; Enron retains guarantee on $500 million loan from Citibank, which is off balance sheet (in a footnote).
• Stage 2: Enron books sales of assets to Whitewing as revenue and operating profits.

Attachment 5—RADRs Structure

Deal in Substance

• Enron sells Zond wind farms to an “independent” entity to retain “Qualifying Facilities” (QF) benefits in wake of Enron’s acquisition of Portland General Utility.
• Entity is controlled by Enron employees, including Kopper and Fastow and his wife, whose involvement is not known by Enron; the other individual is Bill Dodson, Kopper’s domestic partner.
• RADRs receive a 50+ percent guaranteed return from Enron, which is ultimately realized by the Fastows.

Accounting Results

• Transaction was not treated as a sale for accounting purposes. Enron retained all economic risks and rewards of the wind farms and had an option to repurchase the Zond stock.
• Enron advised the Federal Energy Regulatory Commission (FERC) that the Zond assets were now owned by the RADRs and described the structure; FERC approved continuing Zond’s QF status.

Attachment 6—Chewco

Deal in Substance

• CalPERS is persuaded to participate in JEDI II by having its demand to divest its share of JEDI I satisfied by Chewco’s buying its interest for $383 million, a 22 percent annual return.
• Barclays’ equity in Chewco has characteristics of a collateralized loan.
• Kopper/Dodson equity in Chewco is more than equaled by the management fee paid one week after deal closed; it could be argued that thereafter, Kopper/Dodson have no equity economically at risk.

Accounting Results

• Enron treated the equity in Chewco as independent and thus booked neither the $240 million loan nor the $132 million JEDI advance as Enron balance sheet obligations.

Author’s Note

When does creativity cross the line into unethical behavior? Few companies pushed these boundaries as aggressively as did Enron. This case presents a full trajectory of this issue, tracking the progression of Enron’s use of SPE finance vehicles. It then presents the predicament of one key figure, accountant Ben Glisan, who finds himself questioning whether Chewco, the “next deal,” has, in fact, crossed the line. This case also illustrates how technical details bear on ethics issues. Finally, it presents a classic case in which the driving force for unethical action is less Enron’s business needs, which can be satisfied in a variety of ways, than the personal agendas of certain employees.

In September 2003, Ben Glisan pleaded guilty to conspiring to commit fraud and was sentenced to five years in prison. Conspiracy of Fools provides an account (p. 672) of Glisan’s being brought from prison in jumpsuit and handcuffs to the Houston federal courthouse on February 19, 2004, where he crossed paths with Jeff Skilling on the day the Enron Task Force presented its forty-two count indictment against the former Enron CEO. Glisan was indicted for his work on the Raptor vehicles, a series of SPE structures that built on the RADR and Chewco transactions. Glisan’s ultimate decision in the Chewco matter was to say nothing about any problems; he thereafter became a willing ally of Fastow and Kopper.

Because he was so clearly at the center of Chewco and had knowledge of the detailed terms and conditions, this case is built around Glisan. It was Glisan who had the clearest opportunity and the most detailed knowledge to spot the ethical lines being crossed with Chewco. Although he later denied that he knew about Barclays’ receiving collateral or that Kopper was the other “outside investor” in Chewco, various eyewitnesses cited in The Smartest Guys in the Room (p. 169) say that he was present at meetings where it was discussed. An investigator cited in the same book later concluded: “It is implausible … that he [Glisan] would have concluded that Chewco met the 3% rule.”⁴ Finally, the Powers Committee Report had this to say on the subject of Glisan and Chewco:

“There is little doubt that Kopper (who signed all of the agreements with Barclays and the December 30 letter) was aware of the relevant facts. The evidence also indicates that Glisan, who had principal responsibility for Enron’s account for the transaction, attended meetings at which the details of the reserve accounts and the cash collateral were discussed. If Glisan knew about the cash collateral in the reserve accounts at closing, it is implausible that he (or any other knowledgeable accountant) would have concluded that Chewco met the 3% standard.”⁵

It is not clear from the published sources whether Glisan ever had a moment of doubt such as is depicted in this case. However, the Chewco deal happened early in Glisan’s Enron career; indeed, it is the first deal for which Glisan attracted attention. When he first joined the company, Glisan was well liked; at that time, according to The Smartest Guys in the Room, Glisan was described as affable and even a “boy scout.” In those early days at Enron, Glisan may indeed have had one or several moments of doubt about whether the deal would work. By 1999, however, he is described in The Smartest Guys in the Room as having “morphed into the swaggering arrogance that characterized so many Enron executives.”⁶

The sequential description of Enron’s SPE deals draws from several accounts, including Enron, The Rise and Fall (pp. 122–127), Power Failure (pp. 155–164), The Smartest Guys in the Room (pp. 153–161, 166–170) and Conspiracy of Fools (pp. 142–147, 152–158, 161–164). Details of Whitewing, Mahonia, and RADR appear in The Smartest Guys in the Room (pp. 155–156, 159, and 166–167 respectively). The various accounts were written in that order, and some details came out later that were not available or not picked up by the earlier authors. For example, The Smartest Guys in the Room has a detailed account of the RADR transaction, yet it is only with Conspiracy of Fools that the identity of the two outside investors, through whom Kopper funneled the Fastow money, becomes clear. The Kopper quote denying Chewco information to one of the deal lawyers also comes from Conspiracy of Fools (p. 156). The diagram of the Chewco transaction (Attachment 6) is consistent with that provided in the Powers Committee Report (p. 51).

The other aspect of Chewco that merits attention is its disproportionate impact on Enron’s ultimate fate. Fundamentally, the deal involved finding a buyer for the CalPERS’ stake in JEDI. The underlying assets were valuable. Multiple sources indicate that Enron could have found arm’s-length buyers for the position. However, Andy Fastow had other plans.

Emboldened by getting away with a “fronted investment” into the RADRs, Fastow kept his private-equity specialist, Jim Timmons, from shopping the JEDI opportunity to pension funds; Fastow and Kopper also stonewalled Jordan Mintz, an attorney working on the deal, as to the identity of the outside investors. A legitimate solution to CalPERS’ requirement was preempted while information that might have enabled the deal’s fatal flaws to be spotted was denied to those documenting the transaction. Other than Kopper, only Glisan was probably aware of all the pieces of the puzzle.

Chewco then became the moment when Fastow and Kopper’s pursuit of private gain began to put Enron at risk. They went against the explicit advice received earlier about the necessary independence of the 3 percent outside equity. Later on, when Enron could least afford it, the lawyers and accountants would discover Fastow’s deception. Near the end of October 2001, the Chewco collateral accounts and the money trail back to Kopper would come to light. Enron would have no choice but to take both Chewco and JEDI and all their debts back onto Enron’s consolidated balance sheet. This would happen just as Enron was caught in a spiral of debt-rating downgrades. It would also help convince Chuck Watson and Dynegy that they could not rely on Enron’s financial statements or representations to accurately portray the company’s financial position. Dynegy would soon terminate its proposal to merge with Enron, ending the company’s last hope of avoiding bankruptcy.