Did Enron Trading Ploys Cross Line?

Enron Corp. traders were skilled at making money by exploiting weaknesses in California’s energy markets. But did they cross the line and do anything illegal?

That’s the question a newly impaneled federal grand jury in San Francisco is weighing, and experts are divided over the issue. Where some see fraud and additional high crimes, others see traders simply doing their jobs by playing one market off another or by outsmarting badly designed market rules.

Grand juries operate in secret and their thinking becomes public only if indictments are handed up.

But a trail of subpoenas and interviews indicates that the federal grand jury, aided by the U.S. attorney’s office and the FBI, is examining trading ploys used to create electron traffic jams on California’s high-voltage transmission grid.

Some of the top electricity traders who once worked for Enron have been contacted by investigators and are attempting to work out agreements to cooperate with the many interlocking inquiries into market manipulation in California and other Western states.

A spokesman for the U.S. attorney’s office declined comment, but sources familiar with the grand jury investigation said they believe it is being steered by Assistant U.S. Atty. Patrick D. Robbins in San Francisco, who was named chief of the office’s securities-fraud section a few weeks ago.

Robbins has subpoenaed trading records from the California Independent System Operator, which runs the transmission grid for most of the state. The subpoena, the contents of which were outlined in a Cal-ISO notice to market participants, seeks electricity forecasts filed by power sellers with the grid operator; the records of actual electricity flows; and any payments made to traders under a complex system to relieve congestion on the transmission grid.

“There are a number of federal and state laws that traders may well have violated and that any grand jury is going to take a very close look at,” said Robert Berliner, a Washington energy lawyer who represents Los Angeles County before state and federal regulators.

“It’s clear that these people were doing things they shouldn’t have done.”

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Colorful Nicknames

Berliner pointed, for instance, to evidence produced recently by federal energy regulators that Enron may have illegally traded with its own subsidiary Portland General Electric Co. to evade California’s price caps on electricity generated within the state.

These trading ploys took on colorful nicknames such as Fat Boy, Death Star and Get Shorty. The monikers, one Enron lawyer noted in a December 2000 memo, were dreamed up to aid communication with energy traders at other companies.

But many market experts cast doubt on whether the trading practices by Enron and other companies crossed the blurry line into criminal territory.

Some, such as the Cato Institute, a free-market think tank in Washington, contend that a few of the byzantine trading strategies actually benefited California consumers by bringing extra power into the state--albeit on a last-minute basis at higher cost.

Most of Enron’s trading strategies are “pure arbitrage,” said Gary Ackerman, executive director of the Western Power Trading Forum, an electricity industry group. Arbitrage is the practice of profiting from price differences by buying low in one market and selling high in another.

Particularly tough to prove, according to Ackerman, will be that Enron or any other traders purposely defrauded California consumers. Submitting inaccurate forecasts to California market operators of power sales or power purchases for the next day does not constitute fraud, he said, because Cal-ISO has never defined what it considers to be an acceptable scheduling error.

“It’s an amazingly high standard to get a conviction on something like this,” Ackerman said. “They’re going to have to ... prove that” certain practices “weren’t allowed--and also demonstrate intent.”

Meanwhile, the subpoena received by Cal-ISO sheds some light on which way the federal investigation is headed: It demands records from Dec. 1, 2000, through March 1, 2001, some of the darkest days of California’s energy crisis. In addition, the subpoena seeks documents for May 25, 1999, a day when Enron has admitted it scheduled nearly 2,900 megawatts over a transmission line capable of carrying only 15 megawatts.

The power, of course, never materialized, resulting in higher prices and a minor power shortage. That event is known in energy circles as “the Silver Peak incident”--named for the transmission line involved--and is widely viewed as one of Enron’s earliest attempts to profit by causing congestion on power lines.

Enron was fined $25,000 by California authorities, and the head of its trading division at the time, Lawrence “Greg” Whalley, agreed never to “substantially repeat” such maneuvers. Whalley went on to become Enron’s president, briefly filling the post after Jeffrey K. Skilling resigned from the jobs of chief executive and president in August 2001.

In recent weeks, investigators have contacted some of the top traders who bought and sold electricity at Enron’s around-the-clock power-trading business in Portland, Ore., according to sources familiar with the inquiry. These traders, though, have not yet been called before the grand jury.

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Top Traders Contacted

Included are Tim Belden, who ran the Portland operation and is believed to have developed many of the questionable trading ploys, and John Forney, a key Belden lieutenant, who named one of the schemes after himself. It was called Forney’s Perpetual Loop and was another variation on Enron’s so-called congestion games.

Attempts to reach Belden and his lawyers were unsuccessful. Forney’s attorney declined to comment.

Enron sold its energy-trading operation to the UBS Warburg investment banking firm shortly after it filed for bankruptcy protection last December.

Forney, who now works as a trader for AEP Corp. in Columbus, Ohio, said in a deposition last month that he is attempting to cooperate with several federal and state investigations. The deposition was taken in a civil complaint against several power sellers filed with the Federal Energy Regulatory Commission.

Belden, employed by the energy-trading arm of UBS Warburg in Houston, invoked his constitutional right against self-incrimination during an August deposition related to the same FERC complaint.

But a letter sent to one of Belden’s lawyers, a copy of which was obtained by The Times, noted Belden’s apparent attempt to work out a deal with investigators.

“Given time, Mr. Belden might make arrangements with various federal and state entities that would permit him to respond to questions posed during a deposition,” said the letter from Philip L. Chabot Jr., a lawyer representing the city of Tacoma, Wash., which is among those seeking electricity refunds in the FERC case.

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‘A Callous Disregard’

FERC itself hasn’t minced words regarding Enron’s conduct. In an interim report issued last month, the agency maintained that Enron may have been trying to manipulate prices using trading ploys that involved outright deception.

“Enron’s corporate culture, which permeated all of its affiliated companies... fostered a callous disregard for the American energy customer,” the report said.

In the ploy dubbed Fat Boy, internal Enron documents show, the company submitted an exaggerated estimate of the power its customers would need the next day so it could reap extra payments when the state demanded more power to the grid.

In the Death Star maneuver, Enron would schedule phantom electricity running in the opposite direction to relieve congestion on the grid but would never supply the power. Enron then would be paid without actually doing anything.

Enron assistant general counsel Richard Sanders testified before Congress that he ordered a halt to such questionable trading practices shortly after he learned of them in December 2000.

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Haunting Words

If Enron or any of its employees are convicted in the market-manipulation case, words from the company’s own attorneys may come back to haunt them.

An eight-page memo, written in October 2000 by outside lawyers for Enron, details legal theories that might be used against the Houston-based company to bring criminal or civil charges such as wire fraud, racketeering, price fixing and unfair competition.

“We believe it is imperative that Enron understands in detail what evidence exists with respect to its conduct in the California electricity market as soon as possible,” said the previously reported memo, written by lawyers Gary Fergus and Peter Meringolo, who then worked for Brobeck, Phelger & Harrison in San Francisco.

Both have since left that firm.

“Many of the legal theories ... are dependent upon the intent of the participants and whether there were any redeeming purposes for the conduct in question,” the memo said.

“With the passage of time it may be difficult for Enron to establish the state of mind at the time of the conduct.”

The memo centered on what it characterized as “conduct in the market that is deemed to be deceptive, fraudulent or have improperly influenced the price of electricity.”

One of the specific areas addressed in Brobeck Phelger’s research was antitrust.

“If the attorney general were able to prove that Enron traders in their discussion with other traders were in some fashion signaling steps that Enron was taking in response to market conditions,” the memo said, “that might give rise to a price-fixing allegation, especially if the steps taken were of ‘no apparent redeeming value.’ ”

Enron officials have characterized the Brobeck Phelger memo as a broad exploration of legal theories--not a commentary on specific Enron actions.