Lawyer Says He Issued Warning to Enron

The outside lawyer who wrote a memo detailing the ways Enron Corp. was manipulating California’s energy market warned the company that it might be breaking the law, says the statement he plans to deliver to Congress today.

After receiving the memo in early December 2000, an Enron staff attorney said he ordered an end to the trading practices, states his statement to a Senate committee investigating price manipulation in Western energy markets.

Late Tuesday, the attorneys general of California, Oregon and Washington sent the committee documents subpoenaed from Enron’s major electricity trading floor in Portland, Ore. The documents describe Enron’s trading strategies and “provide strong confirmation that West Coast energy markets were harmed by price manipulations,” California Atty. Gen. Bill Lockyer said.

The hearing was called last week after federal energy regulators released copies of internal Enron memos written during California’s energy crisis. One memo, dated Dec. 6, 2000, detailed trading ploys used by Enron that in at least one instance “may have contributed” to a statewide power shortage.

As the lawyers who wrote and received the now-infamous Enron memos prepared to testify before the Senate subcommittee on consumer affairs, the chairman of another Senate panel investigating Enron’s collapse said his inquiry has raised questions about whether federal energy regulators “heeded important warning signs” that left consumers unprotected from potential energy market abuses.

Sen. Joseph I. Lieberman (D-Conn.), chairman of the Senate Governmental Affairs Committee, made his comments in a sharply critical letter to Pat Wood III, chairman of the Federal Energy Regulatory Commission, on the eve of congressional hearings today on Enron’s strategies to drive up electricity prices during California’s power crisis.

“FERC’s job is not simply to promote market changes, but to anticipate and monitor new developments and problems and to protect the consumer against abuse,” Lieberman said. “That latter role seems to have been neglected.”

Lieberman was critical of a May 2001 FERC investigation of Enron’s electronic trading activities that he said asked “some of the right questions ... but ultimately settled for incomplete, unconvincing or incorrect answers.”

The four lawyers who wrote the trading memos released last week and the Enron lawyer who received the memos, which detail a smorgasbord of trading strategies to boost profit in the California market, are expected to explain how the documents came to be written and how they were received by Enron, then the world’s largest energy trader.

Stephen Hall was an attorney with law firm Stoel Rives in October 2000 when he was asked by Enron to research the company’s trading practices. Hall said he found the techniques to be deceptive and delivered his report--along with copies of California’s criminal statutes on fraud and theft--to a corporate official, according to testimony expected to be delivered today.

Hall, who subsequently went to work for Enron’s trading operation and is employed by the new owner of that business, UBS Warburg, could not be reached for comment.

Hall, in his statement, said his supervising partner delivered the copies of the criminal statutes because he “wanted it to be clear to Enron that deceptive practices could constitute violations not only of ISO rules but also possibly of criminal statutes.” ISO refers to the California Independent System Operator, which runs the state’s power grid and operates an electricity market.

“As I learned about Enron’s trading practices, I became increasingly concerned,” he said. “In the course of my discussions with traders, I became aware that certain of these trading strategies involved deception.”

For example, he said, one strategy dubbed Load Shift appeared to involve submitting schedules to the ISO that intentionally overstated or understated the load in different zones to cause the ISO to make payments to relieve the supposed congestion.

“As I learned of deceptive practices, I advised the traders with whom I spoke that such practices were deceptive and that they should stop such practices immediately,” he said. “I also attended meetings in which Enron traders provided assurances that such practices had been discontinued.”

Hall said he e-mailed the memo to Enron’s in-house counsel and outside litigation counsel.

The documents released Tuesday by the attorneys general include handwritten notes from company meetings in early October 2000 that describe trading and public relations strategies to address investigations. “Can they tell how much money we’re making?” said one. Another note said the range of public positions stretched from “answer questions, say nothing” to “answer questions, finger others.”

Lockyer said the notes describe comments by Tim Belden, head of Enron’s West Coast trading operations. One document referred to British Columbia’s electric utility and Tulsa-based Williams Cos. as “hogs at trough.” California sued those two companies alleging overcharges in the state’s markets.

Richard B. Sanders, a senior Enron attorney, said in a statement to the committee that although he was not confident the Hall memo was accurate, he “directed that certain trading practices described therein be suspended.”

Sanders said he then authorized outside counsel from another firm to review the Hall memo and trading practices and to write another memo “so that I could provide appropriate legal advice to the company.” That follow-up memo disputed some findings of the first.

Lieberman’s panel is probing whether the government could have done more to prevent Enron’s collapse, but his letter is likely to come up at the two hearings planned today by other Senate committees investigating price manipulation.

“We simply cannot accept anything less than proactive and energetic efforts by FERC to understand, monitor and, where necessary, regulate changing market developments,” Lieberman said.

Although he said he could not conclude that a more proactive FERC inquiry would have sounded the alarm about Enron’s shaky financial condition, “a better investigation may well have exposed the cracks in Enron’s foundation sooner.”