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Enron Is Center of U.S. Probe of Alleged Power-Price Fraud by John R. Wilke and Kathryn Kranhold, Staff Reporters Wall Street - September 16, 2002

Second Grand Jury Is Empaneled to Hear Evidence of Wrongdoing in California Crisis

WASHINGTON -- Federal prosecutors are investigating alleged fraud by Enron Corp. in the manipulation of power prices in three Western states during the California electricity crisis two years ago.

The Justice Department is presenting evidence to a new grand jury that was convened in San Francisco this summer, lawyers close to the case said. It is the second grand jury in the Enron case; a special grand jury in Houston already had been investigating last year's collapse of the energy-trading firm.

Prosecutors are investigating whether Enron and other companies made fraudulent electricity trades between 1999 and 2001, and whether top Enron management knew what was going on at the hugely profitable trading unit, the lawyers close to the case said. They said that as part of this effort, the prosecutors are examining whether Jeffrey Skilling, Enron's former chief executive, and Greg Whalley, its former president and head of trading, were aware of the practices or sought to conceal them.

Enron traders made false trades to overload California's power-transmission system, then sought state payments for relieving the congestion they had caused, even as they drove up the price of power sold to the state, according to state and federal investigators and lawyers close to the case.

The state and federal investigators believe the alleged schemes by Enron and a handful of other power traders helped fuel the California electricity crisis two years ago, leading to rolling blackouts, political and economic chaos and higher rates for millions of customers in California, Oregon and Washington.

The electricity-trading investigation and the empaneling of a second grand jury takes the Enron investigation in a significant new direction, and could result in criminal charges against several other senior former executives and traders who oversaw Enron's Western states power-trading operations. At least two traders already have invoked their Fifth Amendment rights and declined to testify in other lawsuits arising from the power crisis, and some have said they are cooperating with federal investigators.

Mr. Whalley has retained a new criminal lawyer, Zachary Carter, a former U.S. attorney, to represent him in the power-trading investigation; Mr. Carter declined to comment. An attorney for Mr. Skilling didn't return calls; in congressional testimony earlier this year, Mr. Skilling denied wrongdoing at Enron and defended his stewardship of the energy company. Asked specifically about Enron's electricity-trading practices, he told lawmakers that "the rules weren't quite clear" in California's newly deregulated electricity market and that overbooking power lines in some instances "is absolutely standard industry practice."

The new grand jury has been hearing evidence from agents of the Federal Bureau of Investigation and prosecutors with the U.S. Attorney's office in San Francisco, who are working with the Justice Department's Enron task force. The grand jury has called members of the California Independent System Operator, the body that runs the state's electricity transmission system, and others involved in the meltdown of California's power market two years ago, one lawyer close to the case said.

Some of the power-trading practices were outlined by the Federal Energy Regulatory Commission this summer and are the subject of a thicket of public and private litigation, as well as investigations by California Attorney General Bill Lockyer and a special committee of the state Senate.

The U.S. Commodity Futures Trading Commission and the U.S. Attorney in Houston are investigating "round trip" trading and the alleged manipulation of energy prices on Internet-trading sites. Round-trip, or "wash," trading occurs when two firms exchange matched gas or power contracts that cancel each other out while inflating reported revenue and trading volume. A half-dozen energy-trading firms that did business online already have disclosed receiving subpoenas in the Houston inquiry.

Some of the questionable Enron power-trading practices were first outlined in memos that Enron's new management gave to FERC in May. Enron traders gave the complex practices colorful names such as "Death Star," "Get Shorty" and "Ricochet." Many of the alleged schemes involved scheduling power transmissions that never were actually delivered, or deliberately overbooking transmission lines at choke-points such as the California-Oregon border. Enron then would seek multimillion-dollar payouts for relieving congestion, as well as getting higher prices for power.

In an August study of the California energy crisis, FERC said Enron and two trading partners, Avista Corp., of Spokane, Wash., and El Paso Electric Co., of El Paso, Texas, may have manipulated prices during the crisis that began in the summer of 2000 and ended a year later when price caps were imposed. The commission has said that some of the trading strategies were legal and were a form of arbitrage, while questioning others.

Enron's internal memos laying out the trading practices were produced in the fall of 2000 after the firm was subpoenaed by California's electricity regulators. Stephen Hall, then an outside lawyer for Enron, told Congress that he was asked to draft a memo reviewing the company's practices in light of the subpoena. Mr. Hall said he and a partner warned senior Enron executives in December 2000 that these "deceptive trading practices" might violate criminal law.

Christopher Yoder, a former Enron lawyer who was listed as a co-author of the memos, told Congress he immediately got the memo to his supervisors and to a lawyer at Enron North America. Mr. Yoder, now a lawyer with the energy-trading unit that UBS Warburg acquired from Enron, said he wanted to "make sure the seriousness of the memo was reflected to upper management."

Additionally, Richard Sanders, a top Enron lawyer, told Senate lawmakers that he had several meetings with Enron traders after the firm's internal investigation started, on Oct. 3, 2000. Mr. Sanders said he also met with top Enron executives, including the general counsel, in the fall of 2000 to discuss the trading practices; it is unclear whether the former chief executive, Mr. Skilling, or Enron's former chairman, Kenneth Lay, knew of the practices in 2000. Mr. Sanders has said that he briefed Mr. Skilling on the practices in June 2001 after they were ended.

Christopher Tayback, a Los Angeles defense attorney, said his clients, Messrs. Yoder and Sanders, are cooperating with all investigations, including the Justice Department's. Mr. Hall, who like Mr. Yoder now works for UBS Warburg Energy, couldn't be reached.